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HAWTHORN BANCSHARES, INC. - Quarter Report: 2013 September (Form 10-Q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended September 30, 2013

 

or

 

o

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from                    to                    

 

Commission File Number: 0-23636

 

HAWTHORN BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

 

Missouri

 

43-1626350

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

132 East High Street, Box 688, Jefferson City, Missouri 65102

(Address of principal executive offices)  (Zip Code)

 

(573) 761-6100

(Registrant’s telephone number, including area code)

 

N/A

(Former name, former address and former fiscal year, if changed since last report.)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   x Yes   o  No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  x Yes   o  No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.:

 

Large accelerated filer o

Accelerated filer o

 

 

Non-accelerated filer  x (Do not check if a smaller reporting company)

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  o Yes   x  No

 

As of November 14, 2013, the registrant had 5,032,679 shares of common stock, par value $1.00 per share, outstanding

 

Index to Exhibits located on page 61

 

 

 



 

Part I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Balance Sheets (unaudited)

(In thousands, except per share data)

 

 

 

September 30,

 

December 31,

 

 

 

2013

 

2012

 

ASSETS

 

 

 

 

 

Cash and due from banks

 

$

24,683

 

$

31,020

 

Federal funds sold and other overnight interest-bearing deposits

 

1,090

 

27,857

 

Cash and cash equivalents

 

25,773

 

58,877

 

Investment in available-for-sale securities, at fair value

 

213,629

 

200,246

 

Loans

 

823,042

 

846,984

 

Allowances for loan losses

 

(14,254

)

(14,842

)

Net loans

 

808,788

 

832,142

 

Premises and equipment - net

 

37,602

 

37,021

 

Investments in Federal Home Loan Bank stock and other equity securities, at cost

 

4,001

 

3,925

 

Mortgage servicing rights

 

3,079

 

2,549

 

Other real estate owned and repossessed assets - net

 

15,868

 

23,592

 

Accrued interest receivable

 

4,956

 

5,190

 

Cash surrender value - life insurance

 

2,192

 

2,136

 

Other assets

 

15,427

 

15,928

 

Total assets

 

$

1,131,315

 

$

1,181,606

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Deposits

 

 

 

 

 

Non-interest bearing demand

 

$

179,959

 

$

192,271

 

Savings, interest checking and money market

 

412,887

 

405,702

 

Time deposits $100,000 and over

 

115,370

 

120,777

 

Other time deposits

 

243,262

 

272,525

 

Total deposits

 

951,478

 

991,275

 

Federal funds purchased and securities sold under agreements to repurchase

 

25,007

 

21,058

 

Subordinated notes

 

49,486

 

49,486

 

Federal Home Loan Bank advances

 

24,013

 

20,126

 

Accrued interest payable

 

456

 

909

 

Other liabilities

 

9,048

 

6,532

 

Total liabilities

 

1,059,488

 

1,089,386

 

Stockholders’ equity:

 

 

 

 

 

Preferred stock, $0.01 par value per share, 1,000,000 shares authorized; Issued 0 shares and 18,255 shares, respectively, $1,000 per share liquidation value, net of discount

 

0

 

17,977

 

Common stock, $1 par value, authorized 15,000,000 shares; Issued 5,194,537 and 5,000,972 shares, respectively

 

5,195

 

5,001

 

Surplus

 

33,380

 

31,816

 

Retained earnings

 

38,609

 

39,118

 

Accumulated other comprehensive (loss) income, net of tax

 

(1,840

)

1,825

 

Treasury stock; 161,858 shares, at cost

 

(3,517

)

(3,517

)

Total stockholders’ equity

 

71,827

 

92,220

 

Total liabilities and stockholders’ equity

 

$

1,131,315

 

$

1,181,606

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

2



 

HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Operations (unaudited)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

(In thousands, except per share amounts)

 

2013

 

2012

 

2013

 

2012

 

INTEREST INCOME

 

 

 

 

 

 

 

 

 

Interest and fees on loans

 

$

10,186

 

$

10,881

 

$

31,009

 

$

33,068

 

Interest on debt securities:

 

 

 

 

 

 

 

 

 

Taxable

 

873

 

1,016

 

2,689

 

3,216

 

Nontaxable

 

212

 

225

 

641

 

688

 

Federal funds sold and other overnight interest-bearing deposits

 

6

 

6

 

35

 

43

 

Dividends on other securities

 

21

 

23

 

62

 

79

 

Total interest income

 

11,298

 

12,151

 

34,436

 

37,094

 

INTEREST EXPENSE

 

 

 

 

 

 

 

 

 

Interest on deposits:

 

 

 

 

 

 

 

 

 

Savings, interest checking and money market

 

238

 

265

 

752

 

919

 

Time deposit accounts $100,000 and over

 

224

 

297

 

705

 

1,316

 

Other time deposits

 

535

 

979

 

2,275

 

2,286

 

Interest on federal funds purchased and securities sold under agreements to repurchase

 

7

 

7

 

17

 

17

 

Interest on subordinated notes

 

323

 

346

 

963

 

1,045

 

Interest on Federal Home Loan Bank advances

 

106

 

135

 

315

 

403

 

Total interest expense

 

1,433

 

2,029

 

5,027

 

5,986

 

Net interest income

 

9,865

 

10,122

 

29,409

 

31,108

 

Provision for loan losses

 

0

 

4,700

 

2,000

 

7,900

 

Net interest income after provision for loan losses

 

9,865

 

5,422

 

27,409

 

23,208

 

NON-INTEREST INCOME

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

1,463

 

1,360

 

4,213

 

4,067

 

Trust department income

 

179

 

234

 

598

 

670

 

Real estate servicing fees, net

 

338

 

(62

)

760

 

(348

)

Gain on sale of mortgage loans, net

 

175

 

779

 

1,515

 

1,773

 

Gain on sale of investment securities

 

0

 

26

 

554

 

26

 

Other

 

292

 

343

 

903

 

905

 

Total non-interest income

 

2,447

 

2,680

 

8,543

 

7,093

 

NON-INTEREST EXPENSE

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

4,863

 

4,761

 

14,596

 

14,465

 

Occupancy expense, net

 

695

 

666

 

1,973

 

1,953

 

Furniture and equipment expense

 

474

 

431

 

1,438

 

1,403

 

FDIC insurance assessment

 

253

 

249

 

753

 

752

 

Legal, examination, and professional fees

 

207

 

284

 

727

 

880

 

Advertising and promotion

 

310

 

288

 

907

 

750

 

Postage, printing, and supplies

 

308

 

274

 

854

 

817

 

Processing expense

 

749

 

888

 

2,758

 

2,667

 

Other real estate expense, net

 

1,265

 

1,725

 

4,437

 

3,174

 

Other

 

848

 

812

 

2,745

 

3,094

 

Total non-interest expense

 

9,972

 

10,378

 

31,188

 

29,955

 

Income (loss) before income taxes

 

2,340

 

(2,276

)

4,764

 

346

 

Income tax expense (benefit)

 

771

 

(704

)

1,519

 

(273

)

Net income (loss)

 

1,569

 

(1,572

)

3,245

 

619

 

Preferred stock dividends

 

0

 

228

 

337

 

894

 

Accretion of discount on preferred stock

 

0

 

72

 

278

 

587

 

Total preferred stock dividends and accretion of discount on preferred stock

 

0

 

300

 

615

 

1,481

 

Net income (loss) available to common shareholders

 

$

1,569

 

$

(1,872

)

$

2,630

 

$

(862

)

Basic earnings (loss) per share

 

$

0.31

 

$

(0.37

)

$

0.52

 

$

(0.17

)

Diluted earnings (loss) per share

 

$

0.31

 

$

(0.37

)

$

0.52

 

$

(0.17

)

 

See accompanying notes to the unaudited consolidated financial statements.

 

3



 

HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (loss) (unaudited)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

(In thousands)

 

2013

 

2012

 

2013

 

2012

 

Net income (loss)

 

$

1,569

 

$

(1,572

)

$

3,245

 

$

619

 

Other comprehensive (loss) income, net of tax

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

Unrealized (loss) gain on investment securities available-for-sale, net of tax

 

(109

)

315

 

(3,372

)

369

 

Adjustment for gain on sales of investment securities, net of tax

 

0

 

(16

)

(343

)

(16

)

Defined benefit pension plans:

 

 

 

 

 

 

 

 

 

Amortization of prior service cost included in net periodic pension cost, net of tax

 

16

 

26

 

50

 

78

 

Total other comprehensive (loss) income

 

(93

)

325

 

(3,665

)

431

 

Total comprehensive income (loss)

 

$

1,476

 

$

(1,247

)

$

(420

)

$

1,050

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

4



 

HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity (unaudited)

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

Comprehensive

 

 

 

Stock -

 

 

 

Preferred

 

Common

 

 

 

Retained

 

Income

 

Treasury

 

holders’

 

(In thousands)

 

Stock

 

Stock

 

Surplus

 

Earnings

 

(Loss)

 

Stock

 

Equity

 

Balance, December 31, 2011

 

$

29,318

 

$

4,815

 

$

30,266

 

$

40,354

 

$

1,340

 

$

(3,517

)

$

102,576

 

Cumulative effect of change in accounting principle

 

0

 

0

 

0

 

460

 

0

 

0

 

460

 

Balance, January 1, 2012

 

$

29,318

 

$

4,815

 

$

30,266

 

$

40,814

 

$

1,340

 

$

(3,517

)

$

103,036

 

Net income

 

0

 

0

 

0

 

619

 

0

 

0

 

619

 

Other comprehensive income

 

0

 

0

 

0

 

0

 

431

 

0

 

431

 

Stock based compensation expense

 

0

 

0

 

27

 

0

 

0

 

0

 

27

 

Accretion of preferred stock discount

 

587

 

0

 

0

 

(587

)

0

 

0

 

0

 

Redemption of 12,000 shares of preferred stock

 

(12,000

)

0

 

0

 

0

 

0

 

0

 

(12,000

)

Stock dividend

 

0

 

186

 

1,521

 

(1,707

)

0

 

0

 

0

 

Cash dividends declared, preferred stock

 

0

 

0

 

0

 

(975

)

0

 

0

 

(975

)

Cash dividends declared, common stock

 

0

 

0

 

0

 

(707

)

0

 

0

 

(707

)

Balance, September 30, 2012

 

$

17,905

 

$

5,001

 

$

31,814

 

$

37,457

 

$

1,771

 

$

(3,517

)

$

90,431

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2012

 

$

17,977

 

$

5,001

 

$

31,816

 

$

39,118

 

$

1,825

 

$

(3,517

)

$

92,220

 

Net income

 

0

 

0

 

0

 

3,245

 

0

 

0

 

3,245

 

Other comprehensive loss

 

0

 

0

 

0

 

0

 

(3,665

)

0

 

(3,665

)

Stock based compensation expense

 

0

 

0

 

14

 

0

 

0

 

0

 

14

 

Accretion of preferred stock discount

 

278

 

0

 

0

 

(278

)

0

 

0

 

0

 

Redemption of 18,255 shares of preferred stock

 

(18,255

)

0

 

0

 

0

 

0

 

0

 

(18,255

)

Redemption of common stock warrant

 

0

 

0

 

(540

)

0

 

0

 

0

 

(540

)

Stock dividend

 

0

 

194

 

2,090

 

(2,284

)

0

 

0

 

0

 

Cash dividends declared, preferred stock

 

0

 

0

 

0

 

(456

)

0

 

0

 

(456

)

Cash dividends declared, common stock

 

0

 

0

 

0

 

(736

)

0

 

0

 

(736

)

Balance, September 30, 2013

 

$

0

 

$

5,195

 

$

33,380

 

$

38,609

 

$

(1,840

)

$

(3,517

)

$

71,827

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

5



 

HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (unaudited)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

(In thousands)

 

2013

 

2012

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

3,245

 

$

619

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Provision for loan losses

 

2,000

 

7,900

 

Depreciation expense

 

1,204

 

1,447

 

Net amortization of investment securities, premiums, and discounts

 

981

 

851

 

Amortization of intangible assets

 

135

 

307

 

Stock based compensation expense

 

14

 

27

 

Change in fair value of mortgage servicing rights

 

(86

)

985

 

Gain on sale of investment securities

 

(554

)

(26

)

Loss (gain) on sales and dispositions of premises and equipment

 

2

 

(82

)

Loss (gain) on sales and dispositions of other real estate owned and repossessed assets

 

390

 

(220

)

Provision for other real estate owned

 

3,031

 

1,821

 

Decrease (increase) in accrued interest receivable

 

234

 

(126

)

Increase in cash surrender value -life insurance

 

(56

)

(55

)

Decrease in other assets

 

1,729

 

679

 

Decrease (increase) in income tax receivable

 

963

 

(1,714

)

Increase in income tax payable

 

424

 

0

 

Decrease in accrued interest payable

 

(453

)

(370

)

Increase in other liabilities

 

2,083

 

823

 

Origination of mortgage loans for sale

 

(61,297

)

(67,089

)

Proceeds from the sale of mortgage loans

 

63,452

 

68,506

 

Gain on sale of mortgage loans, net

 

(1,515

)

(1,773

)

Other, net

 

(362

)

44

 

Net cash provided by operating activities

 

15,564

 

12,554

 

Cash flows from investing activities:

 

 

 

 

 

Net decrease (increase) in loans

 

17,436

 

(20,929

)

Purchase of available-for-sale debt securities

 

(76,479

)

(69,305

)

Proceeds from maturities of available-for-sale debt securities

 

28,221

 

32,192

 

Proceeds from calls of available-for-sale debt securities

 

6,255

 

33,095

 

Proceeds from sales of available-for-sale debt securities

 

22,115

 

790

 

Proceeds from sales of FHLB stock

 

535

 

100

 

Purchases of FHLB stock

 

(612

)

0

 

Purchases of premises and equipment

 

(1,787

)

(1,155

)

Proceeds from sales of premises and equipment

 

0

 

269

 

Proceeds from sales of other real estate owned and repossessed assets

 

7,586

 

5,553

 

Net cash provided (used) by investing activities

 

3,270

 

(19,390

)

Cash flows from financing activities:

 

 

 

 

 

Net (decrease) increase in demand deposits

 

(12,312

)

5,944

 

Net increase in interest-bearing transaction accounts

 

7,185

 

5,034

 

Net decrease in time deposits

 

(34,670

)

(12,792

)

Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase

 

3,949

 

(407

)

Repayment of FHLB advances

 

(15,113

)

(194

)

FHLB advances

 

19,000

 

0

 

Redemption of 18,255 and 12,000 shares, respectively, of preferred stock

 

(18,255

)

(12,000

)

Warrant redemption

 

(540

)

0

 

Cash dividends paid - preferred stock

 

(456

)

(975

)

Cash dividends paid - common stock

 

(726

)

(698

)

Net cash used by financing activities

 

(51,938

)

(16,088

)

Net decrease in cash and cash equivalents

 

(33,104

)

(22,924

)

Cash and cash equivalents, beginning of period

 

58,877

 

43,210

 

Cash and cash equivalents, end of period

 

$

25,773

 

$

20,286

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

6



 

HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (continued) (unaudited)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

(In thousands)

 

2013

 

2012

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

$

5,479

 

$

6,724

 

Income taxes

 

$

131

 

$

1,575

 

Supplemental schedule of noncash investing and financing activities:

 

 

 

 

 

Other real estate and repossessions acquired in settlement of loans

 

$

3,278

 

$

16,328

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

7



 

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

 

Notes to the Consolidated Financial Statements

 

(Unaudited)

 

(1)        Summary of Significant Accounting Policies

 

Hawthorn Bancshares, Inc. (the Company) through its subsidiary, Hawthorn Bank (the Bank), provides a broad range of banking services to individual and corporate customers located within the communities in and surrounding Jefferson City, Clinton, Warsaw, Springfield, Branson, and Lee’s Summit, Missouri. The Company is subject to competition from other financial and nonfinancial institutions providing financial products. Additionally, the Company and its subsidiaries are subject to the regulations of certain regulatory agencies and undergo periodic examinations by those regulatory agencies.

 

The accompanying unaudited consolidated financial statements of the Company have been prepared in conformity with U.S. generally accepted accounting principles (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q, and Rule 10-01 of Regulation S-X. Accordingly, the unaudited consolidated financial statements do not include all of the information and disclosures required by U.S. GAAP for complete financial statements and should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

 

The accompanying unaudited consolidated financial statements include all adjustments that, in the opinion of management, are necessary in order to make those statements not misleading. Management is required to make estimates and assumptions, including the determination of the allowance for loan losses, real estate acquired in connection with foreclosure or in satisfaction of loans, fair values of investment securities available-for-sale, and the valuation of mortgage servicing rights that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company’s management has evaluated and did not identify any subsequent events or transactions requiring recognition or disclosure in the consolidated financial statements.

 

Stock Dividend On July 1, 2013, the Company paid a special stock dividend of four percent to common shareholders of record at the close of business on June 15, 2013. For all periods presented, share information, including basic and diluted earnings per share, has been adjusted retroactively to reflect this change.

 

The following represents significant new accounting principles adopted in 2013:

 

Balance Sheet In December 2011, the FASB issued ASU 2011-11, Disclosures about Offsetting Assets and Liabilities. The ASU is a joint requirement by the FASB and International Accounting Standards Board to enhance current disclosures and increase comparability of U.S. GAAP and International Financial Reporting Standards (IFRS) financial statements. Under the ASU, an entity will be required to disclose both gross and net information about instruments and transactions eligible for offset in the balance sheet, as well as instruments and transactions subject to an agreement similar to a master netting agreement. ASU 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities, was issued in January 2013, and amended ASU 2011-11 to specifically include only derivatives accounted for under Topic 815, repurchase and reverse purchase agreements, and securities and borrowing and lending transactions that are either offset or subject to an enforceable master netting arrangement. Both ASUs are effective for annual and interim periods beginning January 1, 2013. The adoption of these ASUs had no effect on the Company’s financial statements.

 

Other Comprehensive Income In February 2013, the FASB issued ASU No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (AOCI). The amendments of ASU No. 2013-02 require an entity to present, either in the income statement or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income, but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety, an entity is required to cross-reference to other disclosures that provide additional detail about those amounts. This ASU is effective for annual and interim periods beginning January 1, 2013. As a result of the adoption of the ASU, the disclosure of AOCI included in Note 7 contains information regarding reclassifications out of AOCI and into net income.

 

8



 

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

 

Notes to the Consolidated Financial Statements

 

(Unaudited)

 

(2)         Loans and Allowance for Loan Losses

 

Loans

 

A summary of loans, by major class within the Company’s loan portfolio, at September 30, 2013 and December 31, 2012 is as follows:

 

 

 

September 30,

 

December 31,

 

(in thousands)

 

2013

 

2012

 

Commercial, financial, and agricultural

 

$

132,923

 

$

130,040

 

Real estate construction - residential

 

23,664

 

22,177

 

Real estate construction - commercial

 

48,489

 

43,486

 

Real estate mortgage - residential

 

220,174

 

221,223

 

Real estate mortgage - commercial

 

375,876

 

405,092

 

Installment and other consumer

 

21,916

 

24,966

 

Total loans

 

$

823,042

 

$

846,984

 

 

The Bank grants real estate, commercial, installment, and other consumer loans to customers located within the communities surrounding Jefferson City, Clinton, Warsaw, Springfield, Branson and Lee’s Summit, Missouri. As such, the Bank is susceptible to changes in the economic environment in these communities. The Bank does not have a concentration of credit in any one economic sector. Installment and other consumer loans consist primarily of the financing of vehicles. At September 30, 2013, loans with a carrying value of $383.4 million were pledged to the Federal Home Loan Bank as collateral for borrowings and letters of credit.

 

Allowance for loan losses

 

The following is a summary of the allowance for loan losses for the three and nine months ended September 30, 2013, and 2012:

 

 

 

Three Months Ended September 30, 2013

 

 

 

Commercial,

 

Real Estate

 

Real Estate

 

Real Estate

 

Real Estate

 

Installment

 

 

 

 

 

 

 

Financial, &

 

Construction -

 

Construction -

 

Mortgage -

 

Mortgage -

 

Loans to

 

Un-

 

 

 

(in thousands)

 

Agricultural

 

Residential

 

Commercial

 

Residential

 

Commercial

 

Individuals

 

allocated

 

Total

 

Balance at beginning of period

 

$

2,119

 

$

932

 

$

2,202

 

$

2,456

 

$

7,415

 

$

233

 

$

1

 

$

15,358

 

Additions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for loan losses

 

444

 

32

 

(216

)

4

 

(294

)

25

 

5

 

0

 

Deductions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans charged off

 

654

 

0

 

135

 

368

 

178

 

91

 

0

 

1,426

 

Less recoveries on loans

 

(201

)

0

 

0

 

(39

)

(34

)

(48

)

0

 

(322

)

Net loans charged off

 

453

 

0

 

135

 

329

 

144

 

43

 

0

 

1,104

 

Balance at end of period

 

$

2,110

 

$

964

 

$

1,851

 

$

2,131

 

$

6,977

 

$

215

 

$

6

 

$

14,254

 

 

 

 

Nine Months Ended September 30, 2013

 

 

 

Commercial,

 

Real Estate

 

Real Estate

 

Real Estate

 

Real Estate

 

Installment

 

 

 

 

 

 

 

Financial, &

 

Construction -

 

Construction -

 

Mortgage -

 

Mortgage -

 

Loans to

 

Un-

 

 

 

(in thousands)

 

Agricultural

 

Residential

 

Commercial

 

Residential

 

Commercial

 

Individuals

 

allocated

 

Total

 

Balance at beginning of period

 

$

1,937

 

$

732

 

$

1,711

 

$

3,387

 

$

6,834

 

$

239

 

$

2

 

$

14,842

 

Additions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for loan losses

 

725

 

351

 

273

 

(586

)

1,142

 

91

 

4

 

2,000

 

Deductions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans charged off

 

817

 

119

 

135

 

754

 

1,205

 

271

 

0

 

3,301

 

Less recoveries on loans

 

(265

)

0

 

(2

)

(84

)

(206

)

(156

)

0

 

(713

)

Net loans charged off

 

552

 

119

 

133

 

670

 

999

 

115

 

0

 

2,588

 

Balance at end of period

 

$

2,110

 

$

964

 

$

1,851

 

$

2,131

 

$

6,977

 

$

215

 

$

6

 

$

14,254

 

 

9



 

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

 

Notes to the Consolidated Financial Statements

 

(Unaudited)

 

 

 

Three Months Ended September 30, 2012

 

 

 

Commercial,

 

Real Estate

 

Real Estate

 

Real Estate

 

Real Estate

 

Installment

 

 

 

 

 

 

 

Financial, &

 

Construction -

 

Construction -

 

Mortgage -

 

Mortgage -

 

Loans to

 

Un-

 

 

 

(in thousands)

 

Agricultural

 

Residential

 

Commercial

 

Residential

 

Commercial

 

Individuals

 

allocated

 

Total

 

Balance at beginning of period

 

$

3,045

 

$

 709

 

$

1,644

 

$

3,560

 

$

6,107

 

$

232

 

$

17

 

$

15,314

 

Additions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for loan losses

 

1,239

 

(68

)

90

 

118

 

3,241

 

91

 

(11

)

4,700

 

Deductions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans charged off

 

742

 

0

 

0

 

41

 

2,366

 

154

 

0

 

3,303

 

Less recoveries on loans

 

(18

)

0

 

0

 

(19

)

(96

)

(76

)

0

 

(209

)

Net loans charged off

 

724

 

0

 

0

 

22

 

2,270

 

78

 

0

 

3,094

 

Balance at end of period

 

$

3,560

 

$

641

 

$

1,734

 

$

3,656

 

$

7,078

 

$

245

 

$

6

 

$

16,920

 

 

 

 

Nine Months Ended September 30, 2012

 

 

 

Commercial,

 

Real Estate

 

Real Estate

 

Real Estate

 

Real Estate

 

Installment

 

 

 

 

 

 

 

Financial, &

 

Construction -

 

Construction -

 

Mortgage -

 

Mortgage -

 

Loans to

 

Un-

 

 

 

(in thousands)

 

Agricultural

 

Residential

 

Commercial

 

Residential

 

Commercial

 

Individuals

 

allocated

 

Total

 

Balance at beginning of period

 

$

1,804

 

$

1,188

 

$

1,562

 

$

3,251

 

$

5,734

 

$

267

 

$

3

 

$

13,809

 

Additions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for loan losses

 

2,469

 

(614

)

149

 

913

 

4,793

 

187

 

3

 

7,900

 

Deductions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans charged off

 

846

 

0

 

0

 

618

 

3,666

 

425

 

0

 

5,555

 

Less recoveries on loans

 

(133

)

(67

)

(23

)

(110

)

(217

)

(216

)

0

 

(766

)

Net loans charged off

 

713

 

(67

)

(23

)

508

 

3,449

 

209

 

0

 

4,789

 

Balance at end of period

 

$

3,560

 

$

641

 

$

1,734

 

$

3,656

 

$

7,078

 

$

245

 

$

6

 

$

16,920

 

 

10



 

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

 

Notes to the Consolidated Financial Statements

 

(Unaudited)

 

Loans, or portions of loans, are charged off to the extent deemed uncollectible or a loss is confirmed. Loan charge-offs reduce the allowance for loan losses, and recoveries of loans previously charged off are added back to the allowance. If management determines that it is probable that all amounts due on a loan will not be collected under the original terms of the loan agreement, the loan is considered to be impaired. These loans are evaluated individually for impairment, and in conjunction with current economic conditions and loss experience, specific reserves are estimated as further discussed below. Loans not individually evaluated are aggregated by risk characteristics and reserves are recorded using a consistent methodology that considers historical loan loss experience by loan type, delinquencies, current economic conditions, loan risk ratings and industry concentration. Although the allowance for loan losses are comprised of specific and general allocations, the entire allowance is available to absorb credit losses.

 

The following table provides the balance in the allowance for loan losses at September 30, 2013 and December 31, 2012, and the related loan balance by impairment methodology.

 

 

 

Commercial,

 

Real Estate

 

Real Estate

 

Real Estate

 

Real Estate

 

Installment

 

 

 

 

 

 

 

Financial, and

 

Construction -

 

Construction -

 

Mortgage -

 

Mortgage -

 

Loans to

 

Un -

 

 

 

(in thousands)

 

Agricultural

 

Residential

 

Commercial

 

Residential

 

Commercial

 

Individuals

 

allocated

 

Total

 

September 30, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

576

 

$

248

 

$

250

 

$

719

 

$

2,782

 

$

6

 

$

0

 

$

4,581

 

Collectively evaluated for impairment

 

1,534

 

716

 

1,601

 

1,412

 

4,195

 

209

 

6

 

9,673

 

Total

 

$

2,110

 

$

964

 

$

1,851

 

$

2,131

 

$

6,977

 

$

215

 

$

6

 

$

14,254

 

Loans outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

4,392

 

$

2,254

 

$

7,101

 

$

5,217

 

$

16,948

 

$

44

 

$

0

 

$

35,956

 

Collectively evaluated for impairment

 

128,531

 

21,410

 

41,388

 

214,957

 

358,928

 

21,872

 

0

 

787,086

 

Total

 

$

132,923

 

$

23,664

 

$

48,489

 

$

220,174

 

$

375,876

 

$

21,916

 

$

0

 

$

823,042

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

213

 

$

125

 

$

542

 

$

1,069

 

$

2,071

 

$

0

 

$

0

 

$

4,020

 

Collectively evaluated for impairment

 

1,724

 

607

 

1,169

 

2,318

 

4,763

 

239

 

2

 

10,822

 

Total

 

$

1,937

 

$

732

 

$

1,711

 

$

3,387

 

$

6,834

 

$

239

 

$

2

 

$

14,842

 

Loans outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

4,157

 

$

2,496

 

$

7,762

 

$

5,771

 

$

18,959

 

$

44

 

$

0

 

$

39,189

 

Collectively evaluated for impairment

 

125,883

 

19,681

 

35,724

 

215,452

 

386,133

 

24,922

 

0

 

807,795

 

Total

 

$

130,040

 

$

22,177

 

$

43,486

 

$

221,223

 

$

405,092

 

$

24,966

 

$

0

 

$

846,984

 

 

Impaired loans

 

Loans evaluated under ASC 310-10-35 include loans which are individually evaluated for impairment. All other loans are collectively evaluated for impairment under ASC 450-20. Impaired loans totaled $36.2 million and $39.4 million at September 30, 2013 and December 31, 2012, respectively, and are comprised of loans on non-accrual status and loans which have been classified as troubled debt restructurings. Total impaired loans of $36.2 million at September 30, 2013, includes $36.0 million of impaired loans individually evaluated for impairment and $220,000 of non-accrual consumer loans that were collectively evaluated for impairment. Total impaired loans of $39.4 million at December 31, 2012, includes $39.2 million of impaired loans individually evaluated for impairment and $174,000 of non-accrual consumer loans that were collectively evaluated for impairment.

 

The specific reserve component applies to loans evaluated individually for impairment. The net carrying value of impaired loans is generally based on the fair values of collateral obtained through independent appraisals or internal evaluations, or by discounting the total expected future cash flows. At September 30, 2013 and December 31, 2012, $32.4 million and $36.1 million, respectively, of impaired loans were evaluated based on the fair value of the loan’s collateral. Once the impairment

 

11



 

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

 

Notes to the Consolidated Financial Statements

 

(Unaudited)

 

amount is calculated, a specific reserve allocation is recorded. At September 30, 2013, $4.6 million of the Company’s allowance for loan losses was allocated to impaired loans totaling $36.2 million compared to $4.0 million of the Company’s allowance for loan losses allocated to impaired loans totaling approximately $39.4 million at December 31, 2012. Management determined that $12.2 million, or 34%, of total impaired loans required no reserve allocation at September 30, 2013 compared to $14.7 million, or 37%, at December 31, 2012 primarily due to adequate collateral values, acceptable payment history and adequate cash flow ability.

 

The incurred loss component of the general reserve, or loans collectively evaluated for impairment, is determined by applying percentages to pools of loans by asset type. Loans not individually evaluated are aggregated based on similar risk characteristics. Historical loss rates for each risk group, which are updated quarterly, are quantified using all recorded loan charge-offs. Management determined that the previous twelve quarters were reflective of the loss characteristics of the Company’s loan portfolio during the recent economic environment. These historical loss rates for each risk group are used as the starting point to determine allowance provisions. The Company’s methodology includes factors that allow management to adjust its estimates of losses based on the most recent information available. The rates are then adjusted to reflect actual changes and anticipated changes such as changes in specific allowances on loans and real estate acquired through foreclosure, any gains and losses on final disposition of real estate acquired through foreclosure, changes in national and local economic conditions and developments, including general economic and business conditions affecting the Company’s key lending areas, credit quality trends, specific industry conditions within portfolio segments, bank regulatory examination results, and findings of the internal loan review department. These risk factors are generally reviewed and updated quarterly, as appropriate.

 

The categories of impaired loans at September 30, 2013 and December 31, 2012 are as follows:

 

 

 

September 30,

 

December 31,

 

(in thousands)

 

2013

 

2012

 

Non-accrual loans

 

$

28,610

 

$

31,081

 

Troubled debt restructurings continuing to accrue interest

 

7,566

 

8,282

 

Total impaired loans

 

$

36,176

 

$

39,363

 

 

The following tables provide additional information about impaired loans at September 30, 2013 and December 31, 2012, respectively, segregated between loans for which an allowance has been provided and loans for which no allowance has been provided.

 

 

 

 

 

Unpaid

 

 

 

 

 

Recorded

 

Principal

 

Specific

 

(in thousands)

 

Investment

 

Balance

 

Reserves

 

September 30, 2013

 

 

 

 

 

 

 

With no related allowance recorded:

 

 

 

 

 

 

 

Commercial, financial and agricultural

 

$

2,501

 

$

2,581

 

$

0

 

Real estate - construction residential

 

104

 

139

 

0

 

Real estate - construction commercial

 

2,861

 

3,459

 

0

 

Real estate - residential

 

2,419

 

3,214

 

0

 

Real estate - commercial

 

4,084

 

4,344

 

0

 

Consumer

 

220

 

238

 

0

 

Total

 

$

12,189

 

$

13,975

 

$

0

 

With an allowance recorded:

 

 

 

 

 

 

 

Commercial, financial and agricultural

 

$

1,891

 

$

1,984

 

$

576

 

Real estate - construction residential

 

2,150

 

2,272

 

248

 

Real estate - construction commercial

 

4,240

 

4,240

 

250

 

Real estate - residential

 

2,798

 

2,931

 

719

 

Real estate - commercial

 

12,864

 

13,772

 

2,782

 

Consumer

 

44

 

44

 

6

 

Total

 

$

23,987

 

$

25,243

 

$

4,581

 

Total impaired loans

 

$

36,176

 

$

39,218

 

$

4,581

 

 

12



 

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

 

Notes to the Consolidated Financial Statements

 

(Unaudited)

 

 

 

 

 

Unpaid

 

 

 

 

 

Recorded

 

Principal

 

Specific

 

(in thousands)

 

Investment

 

Balance

 

Reserves

 

December 31, 2012

 

 

 

 

 

 

 

With no related allowance recorded:

 

 

 

 

 

 

 

Commercial, financial and agricultural

 

$

3,272

 

$

4,009

 

$

0

 

Real estate - construction residential

 

2,307

 

2,339

 

0

 

Real estate - construction commercial

 

1,879

 

2,102

 

0

 

Real estate - residential

 

1,939

 

2,393

 

0

 

Real estate - commercial

 

5,162

 

5,565

 

0

 

Consumer

 

174

 

186

 

0

 

Total

 

$

14,733

 

$

16,594

 

$

0

 

With an allowance recorded:

 

 

 

 

 

 

 

Commercial, financial and agricultural

 

$

885

 

$

898

 

$

213

 

Real estate - construction residential

 

189

 

189

 

125

 

Real estate - construction commercial

 

5,883

 

6,011

 

542

 

Real estate - residential

 

3,832

 

3,999

 

1,069

 

Real estate - commercial

 

13,797

 

14,167

 

2,071

 

Consumer

 

44

 

44

 

0

 

Total

 

$

24,630

 

$

25,308

 

$

4,020

 

Total impaired loans

 

$

39,363

 

$

41,902

 

$

4,020

 

 

The following table presents by class, information related to the average recorded investment and interest income recognized on impaired loans for the three and nine months ended September 30, 2013 and 2012.

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

Interest

 

 

 

Interest

 

 

 

Interest

 

 

 

Interest

 

 

 

 

 

Recognized

 

 

 

Recognized

 

 

 

Recognized

 

 

 

Recognized

 

 

 

Average

 

For the

 

Average

 

For the

 

Average

 

For the

 

Average

 

For the

 

 

 

Recorded

 

Period

 

Recorded

 

Period

 

Recorded

 

Period

 

Recorded

 

Period

 

(in thousands)

 

Investment

 

Ended

 

Investment

 

Ended

 

Investment

 

Ended

 

Investment

 

Ended

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial, financial and agricultural

 

$

2,598

 

$

22

 

$

3,074

 

$

23

 

$

2,643

 

$

71

 

$

3,315

 

$

66

 

Real estate - construction residential

 

139

 

0

 

1,589

 

0

 

242

 

0

 

737

 

7

 

Real estate - construction commercial

 

3,459

 

0

 

1,879

 

0

 

3,803

 

0

 

1,653

 

0

 

Real estate - residential

 

3,168

 

10

 

2,299

 

5

 

3,179

 

10

 

3,333

 

47

 

Real estate - commercial

 

4,346

 

29

 

3,598

 

28

 

4,348

 

86

 

10,582

 

87

 

Consumer

 

202

 

0

 

181

 

0

 

212

 

1

 

162

 

1

 

Total

 

$

13,912

 

$

61

 

$

12,620

 

$

56

 

$

14,427

 

$

168

 

$

19,782

 

$

208

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial, financial and agricultural

 

$

1,996

 

$

7

 

$

2,890

 

$

7

 

$

2,031

 

$

34

 

$

2,615

 

$

21

 

Real estate - construction residential

 

2,272

 

0

 

189

 

0

 

2,273

 

0

 

189

 

0

 

Real estate - construction commercial

 

4,240

 

0

 

6,192

 

0

 

4,240

 

0

 

6,180

 

0

 

Real estate - residential

 

2,920

 

2

 

3,037

 

4

 

2,947

 

38

 

2,566

 

11

 

Real estate - commercial

 

13,210

 

35

 

15,072

 

2

 

13,524

 

106

 

14,209

 

1

 

Consumer

 

44

 

0

 

0

 

0

 

44

 

0

 

0

 

0

 

Total

 

$

24,682

 

$

44

 

$

27,380

 

$

13

 

$

25,059

 

$

178

 

$

25,759

 

$

33

 

Total impaired loans

 

$

38,594

 

$

105

 

$

40,000

 

$

69

 

$

39,486

 

$

346

 

$

45,541

 

$

241

 

 

The recorded investment varies from the unpaid principal balance primarily due to partial charge-offs taken resulting from current appraisals received. The amount recognized as interest income on impaired loans continuing to accrue interest, primarily related to troubled debt restructurings, was $105,000 and $346,000, and $69,000 and $241,000, for the three and nine months ended September 30, 2013 and 2012, respectively. The average recorded investment on impaired loans is calculated on a monthly basis during the periods reported. Contractual interest lost on loans in non-accrual status was $929,000 at September 30, 2013 compared to $966,000 at September 30, 2012. During the three and nine months ended September 30, 2013, $1,000 and $93,000, respectively, in interest was recognized on loans in non-accrual status on a cash basis. During the three and nine months ended September 30, 2012, there was no significant interest recognized on loans in non-accrual status.

 

13



 

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

 

Notes to the Consolidated Financial Statements

 

(Unaudited)

 

Delinquent and Non-Accrual Loans

 

The delinquency status of loans is determined based on the contractual terms of the notes. Borrowers are generally classified as delinquent once payments become 30 days or more past due.

 

The following table provides aging information for the Company’s past due and non-accrual loans at September 30, 2013 and December 31, 2012.

 

 

 

Current or

 

 

 

90 Days

 

 

 

 

 

 

 

Less Than

 

 

 

Past Due

 

 

 

 

 

 

 

30 Days

 

30 - 89 Days

 

And Still

 

 

 

 

 

(in thousands)

 

Past Due

 

Past Due

 

Accruing

 

Non-Accrual

 

Total

 

September 30, 2013

 

 

 

 

 

 

 

 

 

 

 

Commercial, Financial, and Agricultural

 

$

130,695

 

$

185

 

$

15

 

$

2,028

 

$

132,923

 

Real Estate Construction - Residential

 

21,249

 

160

 

0

 

2,255

 

23,664

 

Real Estate Construction - Commercial

 

41,388

 

0

 

0

 

7,101

 

48,489

 

Real Estate Mortgage - Residential

 

213,627

 

1,798

 

377

 

4,372

 

220,174

 

Real Estate Mortgage - Commercial

 

362,293

 

992

 

0

 

12,591

 

375,876

 

Installment and Other Consumer

 

21,378

 

261

 

14

 

263

 

21,916

 

Total

 

$

790,630

 

$

3,396

 

$

406

 

$

28,610

 

$

823,042

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2012

 

 

 

 

 

 

 

 

 

 

 

Commercial, Financial, and Agricultural

 

$

126,884

 

$

1,821

 

$

0

 

$

1,335

 

$

130,040

 

Real Estate Construction - Residential

 

19,390

 

290

 

0

 

2,497

 

22,177

 

Real Estate Construction - Commercial

 

35,117

 

607

 

0

 

7,762

 

43,486

 

Real Estate Mortgage - Residential

 

213,694

 

2,199

 

0

 

5,330

 

221,223

 

Real Estate Mortgage - Commercial

 

390,032

 

1,122

 

0

 

13,938

 

405,092

 

Installment and Other Consumer

 

24,221

 

520

 

6

 

219

 

24,966

 

Total

 

$

809,338

 

$

6,559

 

$

6

 

$

31,081

 

$

846,984

 

 

Credit Quality

 

The Company categorizes loans into risk categories based upon an internal rating system reflecting management’s risk assessment. Loans are placed on watch status when (1) one or more weaknesses that could jeopardize timely liquidation exits; or (2) the margin or liquidity of an asset is sufficiently tenuous that adverse trends could result in a collection problem. Loans classified as substandard are inadequately protected by the current sound worth and paying capacity of the obligor or by the collateral pledged, if any. Loans so classified may have a well defined weakness or weaknesses that jeopardize the repayment of the debt. Such loans are characterized by the distinct possibility that the Company may sustain some loss if the deficiencies are not corrected. It is the Company’s policy to discontinue the accrual of interest income on loans when management believes that the collection of interest or principal is doubtful. Loans are placed on non-accrual status when (1) deterioration in the financial condition of the borrower exists for which payment of full principal and interest is not expected, or (2) payment of principal or interest has been in default for a period of 90 days or more and the asset is not both well secured and in the process of collection. Subsequent interest payments received on such loans are applied to principal if any doubt exists as to the collectability of such principal; otherwise, such receipts are recorded as interest income on a cash basis.

 

14



 

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

 

Notes to the Consolidated Financial Statements

 

(Unaudited)

 

The following table presents the risk categories by class at September 30, 2013 and December 31, 2012.

 

(in thousands)

 

Commercial,
Financial, &
Agricultural

 

Real Estate
Construction -
 Residential

 

Real Estate
Construction -
 Commercial

 

Real Estate
Mortgage -
 Residential

 

Real Estate
Mortgage -
 Commercial

 

Installment
and other
Consumer

 

Total

 

At September 30, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Watch

 

$

14,825

 

$

933

 

$

3,763

 

$

23,272

 

$

24,985

 

$

399

 

$

68,177

 

Substandard

 

8,506

 

2,564

 

1,082

 

7,794

 

13,885

 

416

 

34,247

 

Non-accrual

 

2,028

 

2,255

 

7,101

 

4,372

 

12,591

 

263

 

28,610

 

Total

 

$

25,359

 

$

5,752

 

$

11,946

 

$

35,438

 

$

51,461

 

$

1,078

 

$

131,034

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Watch

 

$

14,814

 

$

4,580

 

$

6,459

 

$

26,063

 

$

29,753

 

$

672

 

$

82,341

 

Substandard

 

6,485

 

396

 

2,035

 

5,472

 

11,027

 

423

 

25,838

 

Non-accrual

 

1,335

 

2,497

 

7,762

 

5,330

 

13,938

 

219

 

31,081

 

Total

 

$

22,634

 

$

7,473

 

$

16,256

 

$

36,865

 

$

54,718

 

$

1,314

 

$

139,260

 

 

Troubled Debt Restructurings

 

At September 30, 2013, loans classified as troubled debt restructurings (TDRs) totaled $19.3 million, of which $11.7 million was on non-accrual status and $7.6 million was on accrual status. At December 31, 2012, loans classified as TDRs totaled $22.4 million, of which $14.1 million was on non-accrual status and $8.3 million was on accrual status. When an individual loan is determined to be a TDR, the amount of impairment is based upon the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the underlying collateral less applicable selling costs. Accordingly, specific reserves of $1.3 million and $1.5 million related to TDRs were allocated to the allowance for loan losses at September 30, 2013 and December 31, 2012, respectively.

 

The following table summarizes loans that were modified as TDRs during the three and nine months ended September 30, 2013 and 2012:

 

 

 

Three Months Ended September 30,

 

 

 

2013

 

2012

 

 

 

Recorded Investment (1)

 

Recorded Investment (1)

 

(in thousands)

 

Number of
Contracts

 

Pre-
 Modification

 

Post-
 Modification

 

Number of
Contracts

 

Pre-
 Modification

 

Post-
 Modification

 

Troubled Debt Restructurings

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial, financial and agricultural

 

0

 

$

0

 

$

0

 

2

 

$

100

 

$

100

 

Real estate construction - commercial

 

0

 

0

 

0

 

0

 

0

 

0

 

Real estate mortgage - residential

 

0

 

0

 

0

 

2

 

644

 

644

 

Total

 

0

 

$

0

 

$

0

 

4

 

$

744

 

$

744

 

 

 

 

Nine Months Ended September 30,

 

 

 

2013

 

2012

 

 

 

Recorded Investment (1)

 

Recorded Investment (1)

 

(in thousands)

 

Number of
Contracts

 

Pre-
 Modification

 

Post-
 Modification

 

Number of
Contracts

 

Pre-
 Modification

 

Post-
 Modification

 

Troubled Debt Restructurings

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial, financial and agricultural

 

0

 

$

0

 

$

0

 

3

 

$

297

 

$

280

 

Real estate construction - commercial

 

0

 

0

 

0

 

1

 

43

 

42

 

Real estate mortgage - residential

 

1

 

618

 

481

 

2

 

644

 

644

 

Total

 

1

 

$

618

 

$

481

 

6

 

$

984

 

$

966

 

 


(1) The amounts reported post-modification are inclusive of all partial pay-downs and charge-offs, and no portion of the debt was forgiven. Loans modified as a TDR that were fully paid down, charged-off or foreclosed upon during the period ended are not reported.

 

15



 

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

 

Notes to the Consolidated Financial Statements

 

(Unaudited)

 

The Company’s portfolio of loans classified as TDRs include concessions such as interest rates below the current market rate, deferring principal payments, and extending maturity dates. Once a loan becomes a TDR, it will continue to be reported as a TDR until it is ultimately repaid in full, charged-off, or the collateral for the loan is foreclosed and sold. The Company considers a loan in TDR status in default when the borrower’s payment according to the modified terms is at least 90 days past due or has defaulted due to expiration of the loan’s maturity date. During the nine months ended September 30, 2013, one loan meeting the TDR criteria was modified compared to six loans during the nine months ended September 30, 2012. During the three months ended September 30, 2013 there were no new loans modified as TDRs and four loans modified as TDRs during the three months ended September 30, 2012. There were no loans modified as a TDR that defaulted during the three and nine months ended September 30, 2013, and within twelve months of their modification date. No loans modified as a TDR during the three and nine months ended September 30, 2012 defaulted.

 

(3)               Real Estate  and Other Assets Acquired in Settlement of Loans

 

 

 

September 30,

 

December 31,

 

(in thousands)

 

2013

 

2012

 

Commercial

 

$

0

 

$

329

 

Real estate construction - residential

 

126

 

112

 

Real estate construction - commercial

 

10,028

 

13,392

 

Real estate mortgage - residential

 

908

 

1,227

 

Real estate mortgage - commercial

 

9,354

 

14,201

 

Repossessed assets

 

204

 

468

 

Total

 

$

20,620

 

$

29,729

 

Less valuation allowance for other real estate owned

 

(4,752

)

(6,137

)

Total other real estate owned and foreclosed assets

 

$

15,868

 

$

23,592

 

 

Changes in the net carrying amount of other real estate owned and repossessed assets for the three and nine months ended September 30, 2013 and 2012 were as follows:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Balance at beginning of period

 

$

21,977

 

$

29,057

 

$

29,729

 

$

22,997

 

Additions

 

308

 

7,018

 

3,278

 

16,329

 

Proceeds from sales

 

(1,348

)

(2,469

)

(7,581

)

(5,553

)

Charge-offs against the valuation allowance for other real estate owned, net

 

(93

)

(1,075

)

(4,416

)

(1,318

)

Repossessed assets impairment write-downs

 

(39

)

0

 

(239

)

0

 

Net (loss) gain on sales

 

(185

)

144

 

(151

)

220

 

Total other real estate owned and repossessed assets

 

$

20,620

 

$

32,675

 

$

20,620

 

$

32,675

 

Less valuation allowance for other real estate owned

 

(4,752

)

(7,480

)

(4,752

)

(7,480

)

Balance at end of period

 

$

15,868

 

$

25,195

 

$

15,868

 

$

25,195

 

 

16



 

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

 

Notes to the Consolidated Financial Statements

 

(Unaudited)

 

Activity in the valuation allowance for other real estate owned in settlement of loans for the three and nine months ended September 30, 2013 and 2012, respectively, is summarized as follows:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

(in thousands)

 

2013

 

2012

 

2013

 

2012

 

Balance, beginning of year

 

$

3,999

 

$

7,474

 

$

6,137

 

$

6,977

 

Provision for other real estate owned

 

846

 

1,081

 

3,031

 

1,821

 

Charge-offs

 

(93

)

(1,075

)

(4,416

)

(1,318

)

Balance, end of year

 

$

4,752

 

$

7,480

 

$

4,752

 

$

7,480

 

 

The increase in the expense provision for other real estate owned during 2013 primarily related to commercial property located in the Branson area that sold at auction during the second quarter of 2013. These amounts are reflected in other real estate expense in the consolidated statements of operations.

 

(4)               Investment Securities

 

The amortized cost and fair value of debt securities classified as available-for-sale at September 30, 2013 and December 31, 2012 are as follows:

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

unrealized

 

unrealized

 

 

 

(in thousands)

 

cost

 

gains

 

losses

 

Fair value

 

September 30, 2013

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

1,000

 

$

6

 

$

0

 

$

1,006

 

Government sponsored enterprises

 

64,089

 

423

 

674

 

63,838

 

Asset-backed securities

 

114,966

 

1,402

 

2,289

 

114,079

 

Obligations of states and political subdivisions

 

34,299

 

627

 

220

 

34,706

 

Total available for sale securities

 

$

214,354

 

$

2,458

 

$

3,183

 

$

213,629

 

 

 

 

 

 

 

 

 

 

 

December 31, 2012

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

2,000

 

$

30

 

$

0

 

$

2,030

 

Government sponsored enterprises

 

54,327

 

853

 

0

 

55,180

 

Asset-backed securities

 

104,607

 

3,276

 

11

 

107,872

 

Obligations of states and political subdivisions

 

33,959

 

1,222

 

17

 

35,164

 

Total available for sale securities

 

$

194,893

 

$

5,381

 

$

28

 

$

200,246

 

 

All of the Company’s investment securities are classified as available for sale. Agency bonds and notes, agency mortgage-backed securities and agency collateralized mortgage obligations (CMO) include securities issued by the Government National Mortgage Association (GNMA), a U.S. government agency, and the Federal National Mortgage Association (FNMA), the Federal Home Loan Mortgage Corporation (FHLMC) and the Federal Home Loan Bank (FHLB), which are U.S. government-sponsored enterprises.

 

Investment securities that are classified as restricted equity securities primarily consist of Federal Home Loan Bank stock and the Company’s interest in statutory trusts. These securities are reported at cost in other assets in the amount of $4.0 million and $3.9 million as of September 30, 2013 and December 31, 2012, respectively.

 

Debt securities with carrying values aggregating approximately $154.5 million and $146.4 million at September 30, 2013 and December 31, 2012, respectively, were pledged to secure public funds, securities sold under agreements to repurchase, and for other purposes as required or permitted by law.

 

17



 

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

 

Notes to the Consolidated Financial Statements

 

(Unaudited)

 

The amortized cost and fair value of debt securities classified as available-for-sale at September 30, 2013 by contractual maturity are shown below. Expected maturities may differ from contractual maturities because borrowers have the right to call or prepay obligations with or without prepayment penalties.

 

 

 

Amortized

 

Fair

 

(in thousands)

 

cost

 

value

 

Due in one year or less

 

$

6,432

 

$

6,482

 

Due after one year through five years

 

59,976

 

60,495

 

Due after five years through ten years

 

31,843

 

31,488

 

Due after ten years

 

1,137

 

1,085

 

Total

 

99,388

 

99,550

 

Asset-backed securities

 

114,966

 

114,079

 

Total available for sale securities

 

$

214,354

 

$

213,629

 

 

Gross unrealized losses on debt securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2013 and December 31, 2012 were as follows:

 

 

 

Less than 12 months

 

12 months or more

 

Total

 

Total

 

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

(in thousands)

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

 

At September 30, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

Government sponsored enterprises

 

$

27,876

 

$

(674

)

$

0

 

$

0

 

$

27,876

 

$

(674

)

Asset-backed securities

 

68,464

 

(2,281

)

790

 

(8

)

69,254

 

(2,289

)

Obligations of states and political subdivisions

 

9,636

 

(220

)

0

 

0

 

9,636

 

(220

)

Total

 

$

105,976

 

$

(3,175

)

$

790

 

$

(8

)

$

106,766

 

$

(3,183

)

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

Government sponsored enterprises

 

$

1,044

 

$

0

 

$

0

 

$

0

 

$

1,044

 

$

0

 

Asset-backed securities

 

4,729

 

(11

)

0

 

0

 

4,729

 

(11

)

Obligations of states and political subdivisions

 

2,114

 

(17

)

150

 

0

 

2,264

 

(17

)

Total

 

$

7,887

 

$

(28

)

$

150

 

$

0

 

$

8,037

 

$

(28

)

 

The total available for sale portfolio consisted of approximately 350 securities at September 30, 2013. The portfolio included 100 securities having an aggregate fair value of $106.8 million that were in a loss position at September 30, 2013. Securities identified as temporarily impaired which have been in a loss position for 12 months or longer totaled $790,000 at fair value. The $3.2 million aggregate unrealized loss included in accumulated other comprehensive income (loss) at September 30, 2013 was caused by interest rate fluctuations. The total available for sale portfolio consisted of approximately 380 securities at December 31, 2012. The portfolio included 14 securities having an aggregate fair value of $8.0 million that were in a loss position at December 31, 2012. Securities identified as temporarily impaired which have been in a loss position for 12 months or longer totaled $150,000 at fair value. The $28,000 aggregate unrealized loss included in other comprehensive income at December 31, 2012 was caused by interest rate fluctuations. Because the decline in fair value is attributable to changes in interest rates and not credit quality these investments were not considered other-than-temporarily impaired at September 30, 2013 and December 31, 2012, respectively.

 

18



 

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

 

Notes to the Consolidated Financial Statements

 

(Unaudited)

 

The following table presents the components of investment securities gains and losses which have been recognized in earnings.

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

(in thousands)

 

2013

 

2012

 

2013

 

2012

 

Gross gains realized on sales

 

$

0

 

$

26

 

$

554

 

$

26

 

Gross losses realized on sales

 

0

 

0

 

0

 

0

 

Other-than-temporary impairment recognized

 

0

 

0

 

0

 

0

 

Net realized gains

 

$

0

 

$

26

 

$

554

 

$

26

 

 

(5)               Intangible Assets

 

Core Deposit Intangible Asset

 

A summary of amortizable intangible assets at September 30, 2013 and December 31, 2012 is as follows:

 

(in thousands)

 

September 30, 2013

 

December 31, 2012

 

 

 

Gross

 

 

 

 

 

Gross

 

 

 

 

 

 

 

Carrying

 

Accumulated

 

Net

 

Carrying

 

Accumulated

 

Net

 

 

 

Amount

 

Amortization

 

Amount

 

Amount

 

Amortization

 

Amount

 

Core deposit intangible

 

$

4,795

 

$

(4,795

)

$

0

 

$

4,795

 

$

(4,660

)

$

135

 

 

Changes in the net carrying amount of core deposit intangible assets for the three and nine months ended September 30, 2013 and 2012 were as follows:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

(in thousands)

 

2013

 

2012

 

2013

 

2012

 

Balance at beginning of period

 

$

0

 

$

337

 

$

135

 

$

543

 

Additions

 

0

 

0

 

0

 

0

 

Amortization

 

0

 

(101

)

(135

)

(307

)

Balance at end of period

 

$

0

 

$

236

 

$

0

 

$

236

 

 

Mortgage Servicing Rights

 

On January 1, 2012, the Company opted to measure mortgage servicing rights at fair value as permitted by Accounting Standards Codification (ASC) Topic 860-50, Accounting for Servicing Financial Assets. The election of this option resulted in the recognition of a cumulative effect of change in accounting principle of $459,890, which was recorded as an increase to beginning retained earnings. As such, effective January 1, 2012, changes in the fair value of mortgage servicing rights have been recognized in earnings in non-interest income in the period in which the change occurred.

 

At September 30, 2013 and December 31, 2012, respectively, the Company serviced mortgage loans for others totaling $323.0 million and $310.6 million, respectively. Mortgage loan servicing fees, reported as non-interest income, earned on loans sold were $214,000 and $674,000, and $211,000 and $637,000, for the three and nine months ended September 30, 2013 and 2012, respectively.

 

19



 

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

 

Notes to the Consolidated Financial Statements

 

(Unaudited)

 

The table below presents changes in mortgage servicing rights (MSRs) for the three and nine months ended September 30, 2013 and 2012 as follows:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

(in thousands)

 

2013

 

2012

 

2013

 

2012

 

Balance at beginning of period

 

$

2,873

 

$

2,666

 

$

2,549

 

$

2,308

 

Re-measurement to fair value upon election to measure servicing rights at fair value

 

0

 

0

 

0

 

742

 

Originated mortgage servicing rights

 

83

 

231

 

444

 

559

 

Changes in fair value:

 

 

 

 

 

 

 

 

 

Due to change in model inputs and assumptions (1)

 

296

 

96

 

677

 

372

 

Other changes in fair value (2)

 

(173

)

(369

)

(591

)

(1,357

)

Balance at end of period

 

$

3,079

 

$

2,624

 

$

3,079

 

$

2,624

 

 


(1)         The change in fair value resulting from changes in valuation inputs or assumptions used in the valuation model reflects the change in discount rates and prepayment speed assumptions primarily due to changes in interest rates.

 

(2)         Other changes in fair value reflect changes due to customer payments and passage of time. This also includes a one time adjustment of a $538,000 correction of an immaterial prior period error in 2012 due to changing from the straight-line amortization method to an accelerated amortization method of accounting for amortizing MSRs in prior years. If the aforementioned was corrected as of December 31, 2011, the balance at the beginning of the nine month period ending September 30, 2012 would have been $1.8 million.

 

The following key data and assumptions were used in estimating the fair value of the Company’s mortgage servicing rights for the nine months ended September 30, 2013 and 2012:

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2013

 

2012

 

Weighted-Average Constant Prepayment Rate

 

10.94

%

16.32

%

Weighted-Average Note Rate

 

4.02

%

4.38

%

Weighted-Average Discount Rate

 

8.56

%

8.01

%

Weighted-Average Expected Life (in years)

 

5.70

 

3.90

 

 

(6)               Income Taxes

 

Income taxes as a percentage of earnings before income taxes as reported in the consolidated financial statements were 33.0% for the three months ended September 30, 2013 compared to 30.9% for the three months ended September 30, 2012. Income taxes as a percentage of earnings before income taxes as reported in the consolidated financial statements were 31.9% for the nine months ended September 30, 2013 compared to (78.9)% for the nine months ended September 30, 2012. Excluding an immaterial correction of a prior period error of $371,000 and prior year return to provision adjustments, income taxes as a percentage of earnings before income taxes would have been 18.9% for the nine months ended September 30, 2012.

 

The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these temporary differences at September 30, 2013 and, therefore, did not establish a valuation reserve.

 

20



 

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

 

Notes to the Consolidated Financial Statements

 

(Unaudited)

 

(7)                     Stockholders’ Equity

 

Accumulated Other Comprehensive (Loss) Income

 

The following details the change in the components of the Company’s accumulated other comprehensive (loss) income for the nine months ended September 30, 2013:

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

Unrecognized Net

 

Other

 

 

 

 

 

Pension and

 

Comprehensive

 

 

 

Unrealized Gain

 

Postretirement

 

(Loss)

 

(in thousands)

 

on Securities

 

Costs

 

Income

 

Balance, December 31, 2012

 

$

3,265

 

$

(1,440

)

$

1,825

 

Reclassification adjustments to net income:

 

 

 

 

 

 

 

Realized gain on sale of securities, net of tax

 

(343

)

0

 

(343

)

Other comprehensive (loss) income, net of reclassification and tax

 

(3,372

)

50

 

(3,322

)

Balance, September 30, 2013

 

$

(450

)

$

(1,390

)

$

(1,840

)

 

(8)                     Employee Benefit Plans

 

Employee Benefits

 

Employee benefits charged to operating expenses are summarized in the table below.

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

(in thousands)

 

2013

 

2012

 

2013

 

2012

 

Payroll taxes

 

$

266

 

$

278

 

$

832

 

$

857

 

Medical plans

 

483

 

448

 

1,443

 

1,346

 

401k match and profit-sharing

 

97

 

(30

)

287

 

276

 

Pension plan

 

286

 

330

 

858

 

990

 

Other

 

73

 

69

 

153

 

242

 

Total employee benefits

 

$

1,205

 

$

1,095

 

$

3,573

 

$

3,711

 

 

The Company’s profit-sharing plan includes a matching 401k portion, in which the Company matches the first 3% of eligible employee contributions. The Company made annual contributions in an amount up to 6% of income before income taxes and before contributions to the profit-sharing and pension plans for all participants, limited to the maximum amount deductible for federal income tax purposes, for each of the periods shown. In addition, employees were able to make additional tax-deferred contributions.

 

Pension

 

The Company provides a noncontributory defined benefit pension plan for all full-time employees. An employer is required to recognize the funded status of a defined benefit postretirement plan as an asset or liability in its balance sheet and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. Under the Company’s funding policy for the defined benefit pension plan, contributions are made to a trust as necessary to provide for current service and for any unfunded accrued actuarial liabilities over a reasonable period. To the extent that these requirements are fully covered by assets in the trust, a contribution might not be made in a particular year. The Company has not made any contributions to the defined benefit plan for the current plan year through November 14, 2013. The minimum required contribution for the 2013 plan year is estimated to be $665,000. The Company has not determined whether it will make any contributions other than the minimum required funding contribution for 2013.

 

21



 

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

 

Notes to the Consolidated Financial Statements

 

(Unaudited)

 

Components of Net Pension Cost and Other Amounts Recognized in Accumulated Other Comprehensive (Loss) Income

 

The following items are components of net pension cost for the periods indicated:

 

 

 

Estimated

 

Actual

 

(in thousands)

 

2013

 

2012

 

Service cost—benefits earned during the year

 

$

1,211

 

$

1,168

 

Interest costs on projected benefit obligations

 

645

 

668

 

Expected return on plan assets

 

(820

)

(776

)

Expected administrative expenses

 

0

 

40

 

Amortization of prior service cost

 

78

 

78

 

Amortization of unrecognized net loss

 

30

 

46

 

Net periodic pension expense

 

$

1,144

 

$

1,224

 

 

 

 

 

 

 

Pension expense - three months ended September 30, (actual)

 

$

286

 

$

330

 

Pension expense - nine months ended September 30, (actual)

 

$

858

 

$

990

 

 

(9)                     Stock Compensation

 

The Company’s stock option plan provides for the grant of options to purchase up to 547,492 shares of the Company’s common stock to officers and other key employees of the Company and its subsidiaries. All options have been granted at exercise prices equal to fair value and vest over periods ranging from four to five years, except options issued in 2008 to acquire 11,578 shares that vested immediately.

 

The following table summarizes the Company’s stock option activity:

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

Weighted

 

Average

 

Aggregate

 

 

 

Number

 

Average

 

Contractual

 

Intrinsic

 

 

 

of

 

Exercise

 

Term

 

Value

 

 

 

Shares

 

Price

 

(in years)

 

(000)

 

 

 

 

 

 

 

 

 

 

 

Outstanding at beginning of period *

 

223,951

 

$

23.74

 

 

 

 

 

Granted

 

0

 

0.00

 

 

 

 

 

Exercised

 

0

 

0.00

 

 

 

 

 

Forfeited

 

0

 

0.00

 

 

 

 

 

Expired

 

(36,181

)

21.67

 

 

 

 

 

Outstanding at September 30, 2013

 

187,770

 

$

24.13

 

2.8

 

$

0

 

Exercisable at September 30, 2013

 

173,253

 

$

24.31

 

2.6

 

$

0

 

 


* Options have been adjusted to reflect a 4% stock dividend paid on July 1, 2013.

 

Total stock-based compensation expense for the three months ended September 30, 2013 and 2012 was $5,000 and $7,000, respectively, and for the nine months ended September 30, 2013 and 2012 was $14,000 and $27,000, respectively. As of September 30, 2013, the total unrecognized compensation expense related to non-vested stock awards was $55,000 and the related weighted average period over which it is expected to be recognized is approximately 2 years.

 

22



 

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

 

Notes to the Consolidated Financial Statements

 

(Unaudited)

 

(10)              Preferred Stock

 

On December 19, 2008, the Company announced its participation in the U.S. Treasury Department’s Capital Purchase Program (CPP), a voluntary program that provides capital to financially healthy banks. This program was designed to attract broad participation by banking institutions to help stabilize the financial system by encouraging lending.

 

Participating in this program included the Company’s issuance of 30,255 shares of senior preferred stock (with a par value of $1,000 per share) and a ten year warrant to purchase approximately 287,133 shares of common stock (see below for additional information) to the U.S. Department of Treasury in exchange for $30.3 million. On May 9, 2012, the Company redeemed 12,000 shares of preferred stock from the U.S. Department of Treasury by repaying $12.0 million of the $30.3 million CPP funds along with $140,000 of accrued and unpaid dividends on the shares redeemed. Related to these shares was an additional $300,000 of accretion that was recognized at the time of the redemption. On May 15, 2013, the Company redeemed the remaining 18,255 shares of preferred stock from the U.S. Department of Treasury by repaying the $18.3 million of the CPP funds along with $228,187 of accrued and unpaid dividends on the shares redeemed. Related to these shares was an additional $182,209 of accretion that was recognized at the time of the redemption.

 

The common stock warrant was repurchased by the Company on June 11, 2013 pursuant to a letter agreement between the Treasury and the Company for a total repurchase price of $540,000, or $1.88 per warrant share. The repurchase price was based on the fair market value of the warrant as agreed upon by the Company and the Treasury. The repurchase of the warrant ends the Company’s participation in the U.S Treasury Department’s CPP. For the nine months ended September 30, 2013, the Company had declared and paid $456,000 of dividends and recognized $278,000 of accretion of the discount on preferred stock.

 

23



 

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

 

Notes to the Consolidated Financial Statements

 

(Unaudited)

 

(11)              Earnings per Share

 

Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding during the year. Diluted earnings per share gives effect to all dilutive potential common shares that were outstanding during the year. The calculations of basic and diluted earnings per share are as follows for the periods indicated:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

(dollars in thousands, except per share data)

 

2013

 

2012

 

2013

 

2012

 

Basic earnings per common share:

 

 

 

 

 

 

 

 

 

Net income

 

$

1,569

 

$

(1,572

)

$

3,245

 

$

619

 

Less:

 

 

 

 

 

 

 

 

 

Preferred stock dividends

 

0

 

228

 

337

 

894

 

Accretion of discount on preferred stock

 

0

 

72

 

278

 

587

 

Net income available to common shareholders

 

$

1,569

 

$

(1,872

)

$

2,630

 

$

(862

)

Basic earnings per share

 

$

0.31

 

$

(0.37

)

$

0.52

 

$

(0.17

)

Diluted earnings per common share:

 

 

 

 

 

 

 

 

 

Net income

 

$

1,569

 

$

(1,572

)

$

3,245

 

$

619

 

Less:

 

 

 

 

 

 

 

 

 

Preferred stock dividends

 

0

 

228

 

337

 

894

 

Accretion of discount on preferred stock

 

0

 

72

 

278

 

587

 

Net income available to common shareholders

 

$

1,569

 

$

(1,872

)

$

2,630

 

$

(862

)

Average shares outstanding

 

5,032,679

 

5,032,679

 

5,032,679

 

5,032,679

 

Effect of dilutive stock options

 

0

 

0

 

0

 

0

 

Average shares outstanding including dilutive stock options

 

5,032,679

 

5,032,679

 

5,032,679

 

5,032,679

 

Diluted earnings per share

 

$

0.31

 

$

(0.37

)

$

0.52

 

$

(0.17

)

 

Under the treasury stock method, outstanding stock options are dilutive when the average market price of the Company’s common stock, when combined with the effect of any unamortized compensation expense, exceeds the option price during the period, except when the Company has a loss from continuing operations available to common shareholders. In addition, proceeds from the assumed exercise of dilutive options along with the related tax benefit are assumed to be used to repurchase common shares at the average market price of such stock during the period.

 

The following options to purchase shares during the three and nine months ended September 30, 2013 and 2012 were not included in the respective computations of diluted earnings per share because the exercise price of the option, when combined with the effect of the unamortized compensation expense, was greater than the average market price of the common shares and were considered anti-dilutive. The warrant to purchase common stock was repurchased by the Company on June 11, 2013. See Note 10 for additional information.

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Anti-dilutive shares - option shares

 

187,770

 

223,951

 

187,770

 

223,951

 

Anti-dilutive shares - warrant shares

 

0

 

298,618

 

0

 

298,618

 

Total anti-dilutive shares

 

187,770

 

522,569

 

187,770

 

522,569

 

 

24



 

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

 

Notes to the Consolidated Financial Statements

 

(Unaudited)

 

(12)              Fair Value Measurements

 

The Company uses fair value measurements to record fair value adjustments to certain financial and nonfinancial assets and liabilities. The FASB ASC Topic 820, Fair Value Measurements, defines fair value, establishes a framework for the measurement of fair value, and enhances disclosures about fair value measurements. The standard applies whenever other standards require (permit) assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances. In this standard, FASB clarified the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability. In support of this principle, the standard establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. As of September 30, 2013 and December 31, 2012, respectively, there were no transfers into or out of Levels 1, Level 2, or Level 3.

 

The fair value hierarchy is as follows:

 

Level 1 — Inputs are unadjusted quoted prices for identical assets or liabilities in active markets.

 

Level 2 — Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets and liabilities in active markets, such as interest rates and yield curves that are observable at commonly quoted intervals.

 

Level 3 — Inputs are unobservable inputs for the asset or liability and significant to the fair value. These may be internally developed using the Company’s best information and assumptions that a market participant would consider.

 

ASC Topic 820 also provides guidance on determining fair value when the volume and level of activity for the asset or liability have significantly decreased and on identifying circumstances when a transaction may not be considered orderly.

 

The Company is required to disclose assets and liabilities measured at fair value on a recurring basis separate from those measured at fair value on a nonrecurring basis. Nonfinancial assets measured at fair value on a nonrecurring basis would include foreclosed real estate, long-lived assets, and core deposit intangible assets, which are reviewed when circumstances or other events indicate that impairment may have occurred.

 

Valuation methods for instruments measured at fair value on a recurring basis

 

Following is a description of the Company’s valuation methodologies used for assets and liabilities recorded at fair value on a recurring basis:

 

Available-for-sale securities

 

The fair value measurements of the Company’s investment securities are determined by a third party pricing service which considers observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. The fair value measurements are subject to independent verification to another pricing source by management each quarter for reasonableness. Securities classified as available-for-sale are reported at fair value utilizing Level 2 inputs, except U.S. Treasury securities which are reported as Level 1.

 

Mortgage servicing rights

 

The fair value of mortgage servicing rights is based on the discounted value of estimated future cash flows utilizing contractual cash flows, servicing rate, constant prepayment rate, servicing cost, and discount rate factors. Accordingly, the fair value is estimated based on a valuation model that calculates the present value of estimated future net servicing income. The model incorporates assumptions that market participants use in estimating future net servicing income, including estimates of prepayment speeds, market discount rates, cost to service, float earnings rates, and other ancillary income, including late fees. The valuation models estimate the present value of estimated future net servicing income. The Company classifies its servicing rights as Level 3.

 

25



 

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

 

Notes to the Consolidated Financial Statements

 

(Unaudited)

 

 

 

Fair Value Measurements

 

 

 

 

 

Quoted Prices

 

 

 

 

 

 

 

 

 

in Active

 

 

 

 

 

 

 

 

 

Markets for

 

Other

 

Significant

 

 

 

 

 

Identical

 

Observable

 

Unobservable

 

 

 

 

 

Assets

 

Inputs

 

Inputs

 

(in thousands)

 

Fair Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

September 30, 2013

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

U.S. treasury

 

$

1,006

 

$

1,006

 

$

0

 

$

0

 

Government sponsored enterprises

 

63,838

 

0

 

63,838

 

0

 

Asset-backed securities

 

114,079

 

0

 

114,079

 

0

 

Obligations of states and political subdivisions

 

34,706

 

0

 

34,706

 

0

 

Mortgage servicing rights

 

3,079

 

0

 

0

 

3,079

 

Total

 

$

216,708

 

$

1,006

 

$

212,623

 

$

3,079

 

 

 

 

 

 

 

 

 

 

 

December 31, 2012

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

U.S. treasury

 

$

2,030

 

$

2,030

 

$

0

 

$

0

 

Government sponsored enterprises

 

55,180

 

0

 

55,180

 

0

 

Asset-backed securities

 

107,872

 

0

 

107,872

 

0

 

Obligations of states and political subdivisions

 

35,164

 

0

 

35,164

 

0

 

Mortgage servicing rights

 

2,549

 

0

 

0

 

2,549

 

Total

 

$

202,795

 

$

2,030

 

$

198,216

 

$

2,549

 

 

The changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the three and nine months ended September 30, 2013 and 2012 are summarized as follows:

 

 

 

Fair Value Measurements Using

 

 

 

Significant Unobservable Inputs

 

 

 

(Level 3)

 

 

 

Mortgage Servicing Rights

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

(in thousands)

 

2013

 

2012

 

2013

 

2012

 

Balance at beginning of period

 

$

2,873

 

$

2,666

 

$

2,549

 

$

0

 

Transfer into level 3

 

0

 

0

 

0

 

3,050

 

Total gains or losses (realized/unrealized):

 

 

 

 

 

 

 

 

 

Included in earnings

 

123

 

(273

)

86

 

(985

)

Included in other comprehensive income

 

0

 

0

 

0

 

0

 

Purchases

 

0

 

0

 

0

 

0

 

Sales

 

0

 

0

 

0

 

0

 

Issued

 

83

 

231

 

444

 

559

 

Settlements

 

0

 

0

 

0

 

0

 

Balance at end of period

 

$

3,079

 

$

2,624

 

$

3,079

 

$

2,624

 

 

Total gains included in earnings attributable to the change in unrealized gains or losses related to assets still held were $296,000 and $677,000 and $96,000 and $372,000 for the three and nine months ended September 30, 2013 and 2012, respectively.

 

26



 

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

 

Notes to the Consolidated Financial Statements

 

(Unaudited)

 

 

 

 

 

 

 

Input Value

 

 

 

Quantitative Information about Level 3 Fair Value Measurements

 

Nine Months Ended September 30,

 

 

 

Valuation Technique

 

Unobservable Inputs

 

2013

 

2012

 

Mortgage servicing rights

 

Discounted cash flows

 

Weighted average constant prepayment rate

 

10.94

%

16.32

%

 

 

 

 

Weighted average discount rate

 

8.56

%

8.01

%

 

Valuation methods for instruments measured at fair value on a nonrecurring basis

 

Following is a description of the Company’s valuation methodologies used for assets and liabilities recorded at fair value on a nonrecurring basis:

 

Impaired Loans

 

The Company does not record loans at fair value on a recurring basis other than loans that are considered impaired. The net carrying value of impaired loans is generally based on fair values of the underlying collateral obtained through independent appraisals or internal evaluations, or by discounting the total expected future cash flows. Once the fair value of the collateral has been determined and any impairment amount calculated, a specific reserve allocation is made. Because many of these inputs are not observable, the measurements are classified as Level 3. As of September 30, 2013, the Company identified $24.0 million of impaired loans that had specific allowances for losses aggregating $4.6 million.

 

Other Real Estate Owned and Repossessed Assets

 

Other real estate owned and repossessed assets consists of loan collateral that has been repossessed through foreclosure. This collateral is comprised of commercial and residential real estate and other non-real estate property, including autos, manufactured homes, and construction equipment. Other real estate owned assets are recorded as held for sale initially at the lower of the loan balance or fair value of the collateral less estimated selling costs. The Company relies on external appraisals and assessment of property values by internal staff. In the case of non-real estate collateral, reliance is placed on a variety of sources, including external estimates of value and judgment based on experience and expertise of internal specialists. Subsequent to foreclosure, valuations are updated periodically, and the assets may be written down to reflect a new cost basis. Because many of these inputs are not observable, the measurements are classified as Level 3.

 

For assets measured at fair value on a nonrecurring basis during the first nine months of 2013 and 2012, and still held as of September 30, 2013 and 2012, the following table provides the adjustments to fair value recognized during the respective periods, the level of valuation inputs used to determine each adjustment, and the carrying value of the related individual assets or portfolios at September 30, 2013 and 2012.

 

27



 

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

 

Notes to the Consolidated Financial Statements

 

(Unaudited)

 

 

 

Fair Value Measurements Using

 

 

 

 

 

Quoted Prices

 

 

 

 

 

 

 

 

 

 

 

 

 

in Active

 

 

 

 

 

Three

 

Nine

 

 

 

 

 

Markets for

 

Other

 

Significant

 

Months Ended

 

Months Ended

 

 

 

 

 

Identical

 

Observable

 

Unobservable

 

September 30,

 

September 30,

 

 

 

Total

 

Assets

 

Inputs

 

Inputs

 

Total Gains

 

Total Gains

 

(in thousands)

 

Fair Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

(Losses)*

 

(Losses)*

 

September 30, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial, financial, & agricultural

 

$

1,315

 

$

0

 

$

0

 

$

1,315

 

$

(607

)

$

(692

)

Real estate construction - residential

 

1,902

 

0

 

0

 

1,902

 

0

 

(119

)

Real estate construction - commercial

 

3,990

 

0

 

0

 

3,990

 

0

 

0

 

Real estate mortgage - residential

 

2,079

 

0

 

0

 

2,079

 

(81

)

(327

)

Real estate mortgage - commercial

 

10,082

 

0

 

0

 

10,082

 

(376

)

(1,363

)

Consumer

 

38

 

0

 

0

 

38

 

0

 

0

 

Total

 

$

19,406

 

$

0

 

$

0

 

$

19,406

 

$

(1,064

)

$

(2,501

)

Other real estate owned and repossessed assets

 

$

15,868

 

$

0

 

$

0

 

$

15,868

 

$

(320

)

$

(5,006

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial, financial, & agricultural

 

$

876

 

$

0

 

$

0

 

$

876

 

$

(742

)

$

(791

)

Real estate construction - residential

 

130

 

0

 

0

 

130

 

0

 

0

 

Real estate construction - commercial

 

5,458

 

0

 

0

 

5,458

 

0

 

0

 

Real estate mortgage - residential

 

2,311

 

0

 

0

 

2,311

 

(19

)

(564

)

Real estate mortgage - commercial

 

14,607

 

0

 

0

 

14,607

 

(524

)

(1,547

)

Consumer

 

0

 

0

 

0

 

0

 

0

 

0

 

Total

 

$

23,382

 

$

0

 

$

0

 

$

23,382

 

$

(1,285

)

$

(2,902

)

Other real estate owned and repossessed assets

 

$

25,195

 

$

0

 

$

0

 

$

25,195

 

$

(2,778

)

$

(3,186

)

 


* Total gains (losses) reported for other real estate owned and repossessed assets includes charge-offs, valuation write downs, and net losses taken during the periods reported.

 

(13)              Fair Value of Financial Instruments

 

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate such value:

 

Loans

 

The fair values of loans are estimated by discounting the expected future cash flows using the current rates at which similar loans could be made to borrowers with similar credit ratings and for the same remaining maturities. The net carrying amount of impaired loans is generally based on the fair values of collateral obtained through independent appraisals or internal evaluations, or by discounting the total expected future cash flows. This method of estimating fair value does not incorporate the exit-price concept of fair value prescribed by ASC Topic 820.

 

Investment in available-for-sale securities

 

A detailed description of the fair value measurement of the debt instruments in the available-for-sale sections of the investment security portfolio is provided in the Fair Value Measurement section above. A schedule of investment securities by category and maturity is provided in the notes on Investment Securities.

 

Federal Home Loan Bank (FHLB) Stock

 

Ownership of equity securities of FHLB is restricted and there is no established market for their resale. The carrying amount is a reasonable estimate of fair value as this stock can only be sold to FHLB or other member banks at their par value per share.

 

28



 

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

 

Notes to the Consolidated Financial Statements

 

(Unaudited)

 

Federal Funds Sold and Other Overnight Interest-Bearing Deposits

 

The carrying amounts of short-term federal funds sold and securities purchased under agreements to resell, interest earning deposits with banks, and cash and due from banks approximate fair value. Federal funds sold and securities purchased under agreements to resell classified as short-term generally mature in 90 days or less.

 

Mortgage Servicing Rights

 

The fair value of mortgage servicing rights is based on the discounted value of estimated future cash flows utilizing contractual cash flows, servicing rate, constant prepayment rate, servicing cost, and discount rate factors. Accordingly, the fair value is estimated based on a valuation model that calculates the present value of estimated future net servicing income. The model incorporates assumptions that market participants use in estimating future net servicing income, including estimates of prepayment speeds, market discount rates, cost to service, float earnings rates, and other ancillary income, including late fees.

 

Cash Surrender Value – Life Insurance

 

The fair value of Bank owned life insurance (BOLI) approximates the carrying amount. Upon liquidation of these investments, the Company would receive the cash surrender value which equals the carrying amount.

 

Accrued Interest Receivable and Payable

 

For accrued interest receivable and payable, the carrying amount is a reasonable estimate of fair value because of the short maturity for these financial instruments.

 

Deposits

 

The fair value of deposits with no stated maturity, such as noninterest-bearing demand, NOW accounts, savings, and money market, is equal to the amount payable on demand. The fair value of time deposits is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities.

 

Securities Sold under Agreements to Repurchase and Interest-bearing Demand Notes to U.S. Treasury

 

For securities sold under agreements to repurchase and interest-bearing demand notes to U.S. Treasury, the carrying amount is a reasonable estimate of fair value, as such instruments reprice in a short time period.

 

Subordinated Notes and Other Borrowings

 

The fair value of subordinated notes and other borrowings is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for other borrowed money of similar remaining maturities.

 

29



 

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

 

Notes to the Consolidated Financial Statements

 

(Unaudited)

 

A summary of the carrying amounts and fair values of the Company’s financial instruments at September 30, 2013 and December 31, 2012 is as follows:

 

 

 

 

 

 

 

September 30, 2013

 

 

 

 

 

 

 

Fair Value Measurements

 

 

 

 

 

 

 

Quoted Prices

 

 

 

 

 

 

 

 

 

 

 

in Active

 

 

 

Net

 

 

 

 

 

 

 

Markets for

 

Other

 

Significant

 

 

 

September 30, 2013

 

Identical

 

Observable

 

Unobservable

 

 

 

Carrying

 

Fair

 

Assets

 

Inputs

 

Inputs

 

(in thousands)

 

amount

 

value

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

24,683

 

$

24,683

 

$

24,683

 

$

0

 

$

0

 

Federal fund sold and overnight interest-bearing deposits

 

1,090

 

1,090

 

1,090

 

0

 

0

 

Investment in available-for-sale securities

 

213,629

 

213,629

 

1,006

 

212,623

 

0

 

Loans, net

 

808,788

 

818,360

 

0

 

0

 

818,360

 

Investment in FHLB stock

 

2,355

 

2,355

 

0

 

2,355

 

0

 

Mortgage servicing rights

 

3,079

 

3,079

 

0

 

0

 

3,079

 

Cash surrender value - life insurance

 

2,192

 

2,192

 

0

 

2,192

 

0

 

Accrued interest receivable

 

4,956

 

4,956

 

4,956

 

0

 

0

 

 

 

$

1,060,772

 

$

1,070,344

 

$

31,735

 

$

217,170

 

$

821,439

 

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 

 

Non-interest bearing demand

 

$

179,959

 

$

179,959

 

$

179,959

 

$

0

 

$

0

 

Savings, interest checking and money market

 

412,887

 

412,887

 

412,887

 

0

 

0

 

Time deposits

 

358,632

 

360,968

 

0

 

0

 

360,968

 

Federal funds purchased and securities sold under agreements to repurchase

 

25,007

 

25,007

 

25,007

 

0

 

0

 

Subordinated notes

 

49,486

 

30,975

 

0

 

30,975

 

0

 

Federal Home Loan Bank advances

 

24,013

 

25,456

 

0

 

25,456

 

0

 

Accrued interest payable

 

456

 

456

 

456

 

0

 

0

 

 

 

$

1,050,440

 

$

1,035,708

 

$

618,309

 

$

56,431

 

$

360,968

 

 

 

 

 

 

 

 

December 31, 2012

 

 

 

 

 

 

 

Fair Value Measurements

 

 

 

 

 

 

 

Quoted Prices

 

 

 

 

 

 

 

 

 

 

 

in Active

 

 

 

Net

 

 

 

 

 

 

 

Markets for

 

Other

 

Significant

 

 

 

December 31, 2012

 

Identical

 

Observable

 

Unobservable

 

 

 

Carrying

 

Fair

 

Assets

 

Inputs

 

Inputs

 

(in thousands)

 

amount

 

value

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

31,020

 

$

31,020

 

$

31,020

 

$

0

 

$

0

 

Federal fund sold and overnight interest-bearing deposits

 

27,857

 

27,857

 

27,857

 

0

 

0

 

Investment in available-for-sale securities

 

200,246

 

200,246

 

2,030

 

198,216

 

0

 

Loans, net

 

832,142

 

834,824

 

0

 

0

 

834,824

 

Investment in FHLB stock

 

2,278

 

2,278

 

0

 

2,278

 

0

 

Mortgage servicing rights

 

2,549

 

2,549

 

0

 

0

 

2,549

 

Cash surrender value - life insurance

 

2,136

 

2,136

 

0

 

2,136

 

0

 

Accrued interest receivable

 

5,190

 

5,190

 

5,190

 

0

 

0

 

 

 

$

1,103,418

 

$

1,106,100

 

$

66,097

 

$

202,630

 

$

837,373

 

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 

 

Non-interest bearing demand

 

$

192,271

 

$

192,271

 

$

192,271

 

$

0

 

$

0

 

Savings, interest checking, and money market

 

405,702

 

405,702

 

405,702

 

0

 

0

 

Time deposits

 

393,302

 

397,986

 

0

 

0

 

397,986

 

Federal funds purchased and securities sold under agreements to repurchase

 

21,058

 

21,058

 

21,058

 

0

 

0

 

Subordinated notes

 

49,486

 

13,154

 

0

 

13,154

 

0

 

Federal Home Loan Bank advances

 

20,126

 

20,651

 

0

 

20,651

 

0

 

Accrued interest payable

 

909

 

909

 

909

 

0

 

0

 

 

 

$

1,082,854

 

$

1,051,731

 

$

619,940

 

$

33,805

 

$

397,986

 

 

30



 

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

 

Notes to the Consolidated Financial Statements

 

(Unaudited)

 

Off-Balance Sheet Financial Instruments

 

The fair value of commitments to extend credit and standby letters of credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements, the likelihood of the counterparties drawing on such financial instruments, and the present creditworthiness of such counterparties. The Company believes such commitments have been made on terms that are competitive in the markets in which it operates.

 

Limitations

 

The fair value estimates provided are made at a point in time based on market information and information about the financial instruments. Because no market exists for a portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the fair value estimates.

 

(14)              Repurchase Reserve Liability

 

During the third quarter of 2013, the Company increased its repurchase reserve liability by $150,000 for estimated losses incurred on sold loans that is included in gain on sales of mortgage loans. This liability represents management’s estimate of the potential repurchase or make-whole liability for residential mortgage loans originated for sale that may arise from representation and warranty claims that could relate to a variety of issues, including but not limited to, misrepresentation of facts, appraisal issues, or program requirements that may not meet investor guidelines. The Company has not experienced any historical repurchase losses although it was notified during the third quarter of 2013 by one of its two investors that fifteen loans which were foreclosed from 2007 to the present are being reviewed for quality control purposes and may result in payments to the investor as reimbursement for losses. The balance of these loans at foreclosure date totaled $1.5 million and because the investor completes the foreclosure process without notifying the Company of the ultimate loss, if any, upon selling the property, the total potential exposure has been estimated based upon reasonable assumptions of the property values at the time of foreclosure and considering private mortgage insurance reimbursements. At September 30, 2013, the Company was servicing approximately 3,100 loans sold to the secondary market with a balance of approximately $323.0 million compared to $310.0 million at December 31, 2012, and $307.0 million at September 30, 2012.

 

(15)     Commitments and Contingencies

 

The Company issues financial instruments with off-balance-sheet risk in the normal course of business of meeting the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments may involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated balance sheets.

 

The Company’s extent of involvement and maximum potential exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of these instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for financial instruments included on its consolidated balance sheets. At September 30, 2013, no amounts have been accrued for any estimated losses for these financial instruments.

 

The contractual amount of off-balance-sheet financial instruments as of September 30, 2013 and December 31, 2012 is as follows:

 

 

 

September 30,

 

December 31,

 

(in thousands)

 

2013

 

2012

 

Commitments to extend credit

 

$

137,277

 

$

118,412

 

Commitments to originate residential first and second mortgage loans

 

4,252

 

5,171

 

Standby letters of credit

 

2,223

 

2,995

 

 

31



 

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

 

Notes to the Consolidated Financial Statements

 

(Unaudited)

 

Commitments

 

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since certain of the commitments and letters of credit are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the customer. Collateral held varies, but may include accounts receivable, inventory, furniture and equipment, and real estate.

 

Commitments to originate residential loans are made following the Company’s usual underwriting guidelines and do not represent more than a normal amount of risk.

 

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. These standby letters of credit are primarily issued to support contractual obligations of the Company’s customers. The approximate remaining term of standby letters of credit range from one month to five years at September 30, 2013.

 

(16)              Pending Litigation

 

The Company and its subsidiaries are defendants in various legal actions incidental to the Company’s past and current business activities. Based on the Company’s analysis, and considering the inherent uncertainties associated with litigation, management does not believe that it is reasonably possible that these legal actions will materially adversely affect the Company’s consolidated financial condition or results of operations in the near term. The Company records a loss accrual for all legal matters for which it deems a loss is probable and can be reasonably estimated. Some legal matters, which are at early stages in the legal process, have not yet progressed to the point where a loss amount can be estimated.

 

32



 

Item 2 - Management’s Discussion and Analysis of Financial Condition And Results of Operations

 

Forward-Looking Statements

 

This report contains certain forward-looking statements with respect to the financial condition, results of operations, plans, objectives, future performance and business of the Company and its subsidiaries, including, without limitation:

 

·                  statements that are not historical in nature, and

·                  statements preceded by, followed by or that include the words believes, expects, may, will, should, could, anticipates, estimates, intends or similar expressions.

 

Forward-looking statements are not guarantees of future performance or results.  They involve risks, uncertainties and assumptions. Actual results may differ materially from those contemplated by the forward-looking statements due to, among others, the following factors:

 

·                  competitive pressures among financial services companies may increase significantly,

·                  changes in the interest rate environment may reduce interest margins,

·                  general economic conditions, either nationally or in Missouri, may be less favorable than expected and may adversely affect the quality of our loans and other assets,

·                  increases in non-performing assets in the loan portfolios and adverse economic conditions may necessitate increases to our provisions for loan losses,

·                  costs or difficulties related to the integration of the business of the Company and its acquisition targets may be greater than expected,

·                  legislative or regulatory changes may adversely affect the business in which the Company and its subsidiaries are engaged, and

·                  changes may occur in the securities markets.

 

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or the Dodd-Frank Act, was enacted on July 21, 2010. Provisions of the Act address many issues including, but not limited to, capital, interchange fees, compliance and risk management, debit card overdraft fees, the establishment of a new consumer regulator, healthcare, incentive compensation, expanded disclosures and corporate governance. While many of the new regulations under the Act are expected to primarily impact financial institutions with assets greater than $10 billion, the Company expects these new regulations could reduce revenues and increase expenses in the future. Management is currently assessing the impact of the Act and of the regulations anticipated to be promulgated under the Act.

 

The Company has described under the caption Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2012 and in other reports filed with the SEC from time to time, additional factors that could cause actual results to be materially different from those described in the forward-looking statements. Other factors that have not been identified in this report could also have this effect. You are cautioned not to put undue reliance on any forward-looking statement, which speak only as of the date they were made.

 

Overview

 

Through the branch network of its subsidiary bank, the Company, with $1.1 billion in assets at September 30, 2013, provides a broad range of commercial and personal banking services, including certificates of deposit, individual retirement and other time deposit accounts, checking and other demand deposit accounts, interest checking accounts, savings accounts, and money market accounts. The Company also provides a wide range of lending services, including real estate, commercial, installment, and other consumer loans. Other financial services that the Company provides include automated teller machines, trust services, credit-related insurance, and safe-deposit boxes. The geographic areas in which the Company provides products and services include the communities in and surrounding Jefferson City, Clinton, Warsaw, Springfield, Branson and Lee’s Summit, Missouri.

 

33



 

The Company’s primary source of revenue is net interest income derived primarily from lending and deposit taking activities. A secondary source of revenue is investment income. The Company also derives income from trust, brokerage, credit card and mortgage banking activities and service charge income.

 

Much of the Company’s business is commercial, commercial real estate development, and mortgage lending. The Company has experienced soft loan demand in the communities within which we operate during the current economic slowdown. The Company’s income from mortgage brokerage activities is directly dependent on mortgage rates and the level of home purchases and refinancings.

 

The success of the Company’s growth strategy depends primarily on the ability of the banking subsidiary to generate an increasing level of loans and deposits at acceptable risk levels and on acceptable terms without significant increases in non-interest expenses relative to revenues generated. The Company’s financial performance also depends, in part, on the ability to manage various portfolios and to successfully introduce additional financial products and services by expanding new and existing customer relationships, utilizing improved technology, and enhancing customer satisfaction. Furthermore, the success of the Company’s growth strategy depends on the ability to maintain sufficient regulatory capital levels during periods in which general economic conditions are unfavorable and despite economic conditions being beyond its control.

 

Hawthorn Bank (the Bank), the Company’s subsidiary bank, is a full-service bank conducting a general banking business, offering its customers checking and savings accounts, debit cards, certificates of deposit, safety deposit boxes and a wide range of lending services, including commercial and industrial loans, residential real estate loans, single payment personal loans, installment loans and credit card accounts. In addition, the Bank provides trust services.

 

The deposit accounts of the Bank are insured by the Federal Deposit Insurance Corporation (FDIC) to the extent provided by law. The operations of the Bank are supervised and regulated by the FDIC and the Missouri Division of Finance. Periodic examinations of the Bank are conducted by representatives of the FDIC and the Missouri Division of Finance. Such regulations, supervision and examinations are principally for the benefit of depositors, rather than for the benefit of shareholders. The Company is subject to supervision and examination by the Federal Reserve Board.

 

CRITICAL ACCOUNTING POLICIES

 

The following accounting policies are considered most critical to the understanding of the Company’s financial condition and results of operations. These critical accounting policies require management’s most difficult, subjective and complex judgments about matters that are inherently uncertain. Because these estimates and judgments are based on current circumstances, they may change over time or prove to be inaccurate based on actual experiences. In the event that different assumptions or conditions were to prevail, and depending upon the severity of such changes, the possibility of a materially different financial condition and/or results of operations could reasonably be expected. The impact and any associated risks related to the critical accounting policies on the business operations are discussed throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations, where such policies affect the reported and expected financial results.

 

Allowance for Loan Losses

 

Management has identified the accounting policy related to the allowance for loan losses as critical to the understanding of the Company’s results of operations, since the application of this policy requires significant management assumptions and estimates that could result in materially different amounts to be reported if conditions or underlying circumstances were to change. Further discussion of the methodology used in establishing the allowance and the impact of any associated risks related to these policies on the business operations is provided in Note 1 to the Company’s consolidated financial statements and is also discussed in the Lending and Credit Management section below. Many of the loans are deemed collateral dependent for purposes of the measurement of the impairment loss, thus the fair value of the underlying collateral and sensitivity of such fair values due to changing market conditions, supply and demand, condition of the collateral and other factors can be volatile over periods of time. Such volatility can have an impact on the financial performance of the Company.

 

34



 

Income Taxes

 

Income taxes are accounted for under the asset / liability method by recognizing the amount of taxes payable or refundable for the current period and deferred tax assets and liabilities for future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. Judgment is required in addressing the Company’s future tax consequences of events that have been recognized in the consolidated financial statements or tax returns such as realization of the effects of temporary differences, net operating loss carry forwards and changes in tax laws or interpretations thereof. A valuation allowance is established when in the judgment of management, it is more likely than not that such deferred tax assets will not become realizable. In this case, the Company would adjust the recorded value of the deferred tax asset, which would result in a direct charge to income tax expense in the period that the determination was made. Likewise, the Company would reverse the valuation allowance when it is expected to realize the deferred tax asset. In addition, the Company is subject to the continuous examination of its tax returns by the Internal Revenue Service and other taxing authorities. The Company accrues for penalties and interest related to income taxes in income tax expense. As of September 30, 2013, the Company has not recognized any tax liabilities or any interest or penalties in income tax expense related to uncertain tax positions.

 

Other Real Estate Owned and Repossessed Assets

 

Other real estate owned and repossessed assets consist of loan collateral that has been repossessed through foreclosure. This collateral is comprised of commercial and residential real estate and other non-real estate property, including autos, manufactured homes, and construction equipment. Other real estate owned assets are initially recorded as held for sale at the fair value of the collateral less estimated selling costs. Any adjustment is recorded as a charge-off against the allowance for loan losses. The Company relies on external appraisals and assessment of property values by internal staff. In the case of non-real estate collateral, reliance is placed on a variety of sources, including external estimates of value and judgment based on experience and expertise of internal specialists. Subsequent to foreclosure, valuations are updated periodically, and the assets may be written down to reflect a new cost basis. The write-downs are recorded as other real estate expense. The Company establishes a valuation allowance related to other real estate owned on an asset-by-asset basis. The valuation allowance is created during the holding period when the fair value less cost to sell is lower than the cost of the property.

 

35



 

SELECTED CONSOLIDATED FINANCIAL DATA

 

The following table presents selected consolidated financial information for the Company as of and for each of the three and nine months ended September 30, 2013 and 2012, respectively. The selected consolidated financial data should be read in conjunction with the consolidated financial statements of the Company, including the accompanying notes, presented elsewhere herein.

 

Selected Financial Data

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

(In thousands, except per share data)

 

2013

 

2012

 

2013

 

2012

 

Per Share Data

 

 

 

 

 

 

 

 

 

Basic earnings per common share

 

$

0.31

 

$

(0.37

)

$

0.52

 

$

(0.17

)

Diluted earnings per common share

 

0.31

 

(0.37

)

0.52

 

(0.17

)

Dividends paid on preferred stock

 

 

229

 

 

975

 

Accretion of discount on preferred stock

 

 

72

 

456

 

587

 

Dividends paid on common stock

 

242

 

233

 

726

 

698

 

Book value per common share

 

 

 

 

 

14.27

 

14.41

 

Market price per common share

 

 

 

 

 

13.61

 

8.50

 

Selected Ratios

 

 

 

 

 

 

 

 

 

(Based on average balance sheets)

 

 

 

 

 

 

 

 

 

Return on total assets

 

0.54

%

(0.54

)%

0.37

%

0.07

%

Return on common stockholders’ equity

 

8.68

%

(9.95

)%

4.79

%

(1.54

)%

Common stockholders’ equity to total assets

 

6.26

%

6.41

%

7.04

%

6.31

%

 

 

 

 

 

 

 

 

 

 

Efficiency ratio (1)

 

80.99

%

81.07

%

82.18

%

78.41

%

 

 

 

 

 

 

 

 

 

 

(Based on end-of-period data)

 

 

 

 

 

 

 

 

 

Common stockholders’ equity to assets

 

 

 

 

 

6.35

%

6.27

%

Stockholders’ equity to assets

 

 

 

 

 

6.35

%

7.81

%

Total risk-based capital ratio

 

 

 

 

 

15.36

%

16.71

%

Tier 1 risk-based capital ratio

 

 

 

 

 

11.39

%

13.36

%

Leverage ratio

 

 

 

 

 

8.56

%

10.09

%

 


(1) Efficiency ratio is calculated as non-interest expense as a percent of total revenue. Total revenue includes net interest and non-interest income.

 

36



 

RESULTS OF OPERATIONS ANALYSIS

 

The Company has prepared all of the consolidated financial information in this report in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). In preparing the consolidated financial statements in accordance with U.S. GAAP, the Company makes estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. There can be no assurances that actual results will not differ from those estimates.

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

(In thousands)

 

2013

 

2012

 

$
Change

 

%
Change

 

2013

 

2012

 

$
Change

 

%
Change

 

Net interest income

 

$

9,865

 

$

10,122

 

$

(257

)

(2.5

)%

$

29,409

 

$

31,108

 

$

(1,699

)

(5.5

)%

Provision for loan losses

 

 

4,700

 

(4,700

)

(100.0

)

2,000

 

7,900

 

(5,900

)

(74.7

)

Noninterest income

 

2,447

 

2,654

 

(207

)

(7.8

)

7,989

 

7,067

 

922

 

13.0

 

Investment securities gains, net

 

 

26

 

(26

)

NM

 

554

 

26

 

528

 

NM

 

Total noninterest income

 

2,447

 

2,680

 

(233

)

(8.7

)

8,543

 

7,093

 

1,450

 

20.4

 

Noninterest expense

 

9,972

 

10,378

 

(406

)

(3.9

)

31,188

 

29,955

 

1,233

 

4.1

 

Income before income taxes

 

2,340

 

(2,276

)

4,616

 

202.8

 

4,764

 

346

 

4,418

 

NM

 

Income tax expense

 

771

 

(704

)

1,475

 

209.5

 

1,519

 

(273

)

1,792

 

656.4

 

Net income

 

$

1,569

 

$

(1,572

)

$

3,141

 

(199.8

)%

$

3,245

 

$

619

 

$

2,626

 

424.2

%

Less: preferred dividends

 

 

228

 

(228

)

(100.0

)

337

 

894

 

(557

)

(62.3

)

and accretion of discount

 

 

72

 

(72

)

(100.0

)

278

 

587

 

(309

)

(52.6

)

Total

 

 

300

 

(300

)

(100.0

)

615

 

1,481

 

(866

)

(58.5

)

Net income available to common shareholders

 

$

1,569

 

$

(1,872

)

$

3,441

 

(183.8

)%

$

2,630

 

$

(862

)

$

3,492

 

(405.1

)%

 

Consolidated net income of $1.6 million for the quarter ended September 30, 2013 increased $3.1 million compared to a consolidated net loss of $1.6 million for the quarter ended September 30, 2012. Net income available to common shareholders for the quarter ended September 30, 2013 was $1.6 million, or $0.31 per diluted common share, compared to a net loss available to common shareholders of $1.9 million, or $(0.37) per diluted common share for the quarter ended September 30, 2012. For the quarter ended September 30, 2013, the return on average assets was 0.54%, the return on average common stockholders’ equity was 8.68%, and the efficiency ratio was 80.99%.

 

For the nine months ended September 30, 2013, consolidated net income was $3.2 million compared to $619,000 for the nine months ended September 30, 2012. For the nine months ended September 30, 2013, net income available to common shareholders was $2.6 million, or $0.52 per diluted common share, compared to a net loss available to common shareholders of $862,000, or $(0.17) per diluted common share, for the nine months ended September 30, 2012. The lower level of dividends and accretion for the three and nine months ended September 30, 2013 resulted from the Company’s redemption of the remaining 18,255 shares of preferred stock issued under the U.S. Treasury’s CPP program on May 15, 2013. For the nine months ended September 30, 2013, the return on average assets was 0.37%, the return on average common stockholders’ equity was 4.79%, and the efficiency ratio was 82.18%.

 

Net interest income, on a tax equivalent basis, decreased 2.6% to $10.0 million for the quarter ended September 30, 2013 compared to $10.3 million for the quarter ended September 30, 2012. For the nine months ended September 30, 2013, net interest income decreased 5.5% to $29.8 million compared to $31.5 million for the nine months ended September 30, 2012. These decreases were primarily a result of a decrease in the net interest margin due to a decrease in the Company’s average earning assets partially offset by a decrease in average cost of deposits. The net interest margin decreased to 3.74% and 3.68% for the three and nine months ended September 30, 2013 respectively, compared to 3.80% and 3.85% for the three and nine months ended September 30, 2012, respectively.

 

The lower provision for loan losses for the three and nine months ended September 30, 2013 compared to the three and nine months ended September 30, 2012 was primarily a result of the improving credit quality in the Company’s historical loss analysis and reduced levels of nonperforming loans. Net charge-offs for the quarter ended September 30,

 

37



 

2013, were $1.1 million, or 0.17% of average loans compared to $3.1 million, or 0.37% of average loans for the quarter ended September 30, 2012. Net charge-offs for the nine months ended September 30, 2013, were $2.6 million, or 0.40% of average loans compared to $4.8 million, or 0.57% of average loans for the nine months ended September 30, 2012. Non-performing assets were 4.67% of total assets at September 30, 2013 compared to 5.33% at December 31, 2012, and 5.82% at September 30, 2012.

 

Noninterest income decreased $233,000, or 8.7%, for the quarter ended September 30, 2013 and increased $1.4 million, or 20.4%, for the nine months ended September 30, 2013, compared to the nine months ended September 30, 2012. These changes are discussed in greater detail below under Noninterest Income.

 

Noninterest expense decreased $406,000, or 3.9 percent, for the quarter ended September 30, 2013, and increased  $1.2 million, or 4.1%, for the nine months ended September 30, 2013, compared to the nine months ended September 30, 2012. These increases are discussed in greater detail below under Noninterest Expense.

 

Business Events

 

On June 11, 2013 the common stock warrant issued under the U.S Treasury Department’s CPP program was repurchased by the Company pursuant to a letter agreement between the Treasury and the Company for a total repurchase price of $540,000, or $1.88 per warrant share. The repurchase price was based on the fair market value of the warrant as agreed upon by the Company and the Treasury. The repurchase of the warrant ends the Company’s participation in the U.S Treasury Department’s CPP.

 

On July 1, 2013, the Company distributed a four percent stock dividend for the fifth consecutive year to common shareholders of record at the close of business on June 15, 2013. For all periods presented, share information, including basic and diluted earnings per share, has been adjusted retroactively to reflect the stock dividend.

 

Average Balance Sheets

 

Net interest income is the largest source of revenue resulting from the Company’s lending, investing, borrowing, and deposit gathering activities. It is affected by both changes in the level of interest rates and changes in the amounts and mix of interest earning assets and interest bearing liabilities. The following table presents average balance sheets, net interest income, average yields of earning assets, average costs of interest bearing liabilities, net interest spread and net interest margin on a fully taxable equivalent basis for each of the three month and nine month periods ended September 30, 2013 and September 30, 2012, respectively.

 

38



 

 

 

Three Months Ended September 30,

 

 

 

2013

 

2012

 

 

 

 

 

Interest

 

Rate

 

 

 

Interest

 

Rate

 

 

 

Average

 

Income/

 

Earned/

 

Average

 

Income/

 

Earned/

 

(In thousands)

 

Balance

 

Expense(1)

 

Paid(1)

 

Balance

 

Expense(1)

 

Paid(1)

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans: (2) (4)

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

135,428

 

$

1,641

 

4.81

%

$

126,092

 

$

1,620

 

5.11

%

Real estate construction - residential

 

23,679

 

263

 

4.41

 

21,087

 

225

 

4.24

 

Real estate construction - commercial

 

47,691

 

529

 

4.40

 

43,697

 

463

 

4.22

 

Real estate mortgage - residential

 

218,365

 

2,746

 

4.99

 

221,191

 

2,842

 

5.11

 

Real estate mortgage - commercial

 

383,975

 

4,661

 

4.82

 

401,649

 

5,311

 

5.26

 

Consumer

 

22,061

 

370

 

6.65

 

27,474

 

448

 

6.49

 

Total loans

 

$

831,199

 

$

10,210

 

4.87

%

$

841,190

 

$

10,909

 

5.16

%

Investment securities: (3)

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasury

 

$

1,009

 

$

3

 

1.18

%

$

2,041

 

$

8

 

1.56

%

Government sponsored enterprises

 

64,455

 

199

 

1.22

 

69,656

 

231

 

1.32

 

Asset backed securities

 

116,223

 

660

 

2.25

 

118,773

 

765

 

2.56

 

State and municipal

 

34,905

 

328

 

3.73

 

34,790

 

346

 

3.96

 

Total investment securities

 

$

216,592

 

$

1,190

 

2.18

%

$

225,260

 

$

1,350

 

2.38

%

Restricted investments

 

4,074

 

21

 

2.05

 

4,287

 

23

 

2.13

 

Federal funds sold and other overnight interest-bearing deposits

 

8,117

 

6

 

0.29

 

4,112

 

6

 

0.58

 

Total interest earning assets

 

$

1,059,982

 

$

11,427

 

4.28

%

$

1,074,849

 

$

12,288

 

4.55

%

All other assets

 

100,452

 

 

 

 

 

108,898

 

 

 

 

 

Allowance for loan losses

 

(15,423

)

 

 

 

 

(15,471

)

 

 

 

 

Total assets

 

$

1,145,011

 

 

 

 

 

$

1,168,276

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW accounts

 

$

184,912

 

$

118

 

0.25

%

$

176,904

 

$

136

 

0.31

%

Savings

 

76,849

 

21

 

0.11

 

67,162

 

18

 

0.11

 

Money market

 

160,865

 

99

 

0.24

 

152,488

 

111

 

0.29

 

Time deposits of $100,000 and over

 

117,945

 

224

 

0.75

 

127,565

 

297

 

0.93

 

Other time deposits

 

247,349

 

535

 

0.86

 

278,305

 

980

 

1.40

 

Total time deposits

 

$

787,920

 

$

997

 

0.50

%

$

802,424

 

$

1,542

 

0.76

%

Federal funds purchased and securities sold under agreements to repurchase

 

22,335

 

7

 

0.12

 

24,170

 

7

 

0.12

 

Subordinated notes

 

49,486

 

323

 

2.59

 

49,486

 

346

 

2.78

 

Federal Home Loan Bank advances

 

24,837

 

106

 

1.69

 

28,258

 

134

 

1.89

 

Total borrowings

 

$

96,658

 

$

436

 

1.79

%

$

101,914

 

$

487

 

1.90

%

Total interest bearing liabilities

 

$

884,578

 

$

1,433

 

0.64

%

$

904,338

 

$

2,029

 

0.89

%

Demand deposits

 

180,497

 

 

 

 

 

163,538

 

 

 

 

 

Other liabilities

 

8,209

 

 

 

 

 

7,697

 

 

 

 

 

Total liabilities

 

1,073,284

 

 

 

 

 

1,075,573

 

 

 

 

 

Stockholders’ equity

 

71,727

 

 

 

 

 

92,703

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

1,145,011

 

 

 

 

 

$

1,168,276

 

 

 

 

 

Net interest income (FTE)

 

 

 

9,994

 

 

 

 

 

10,259

 

 

 

Net interest spread

 

 

 

 

 

3.64

%

 

 

 

 

3.66

%

Net interest margin

 

 

 

 

 

3.74

%

 

 

 

 

3.80

%

 

39



 


(1)         Interest income and yields are presented on a fully taxable equivalent basis using the Federal statutory income tax rate of 34%, net of nondeductible interest expense. Such adjustments totaled $129,000 and $137,000 for the three months ended September 30, 2013 and 2012, respectively.

(2)         Non-accruing loans are included in the average amounts outstanding.

(3)         Average balances are based on amortized cost.

(4)         Fees and costs on loans are included in interest income.

 

40



 

 

 

Nine Months Ended September 30,

 

 

 

2013

 

2012

 

 

 

 

 

Interest

 

Rate

 

 

 

Interest

 

Rate

 

 

 

Average

 

Income/

 

Earned/

 

Average

 

Income/

 

Earned/

 

(In thousands)

 

Balance

 

Expense(1)

 

Paid(1)

 

Balance

 

Expense(1)

 

Paid(1)

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans: (2) (4)

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

131,525

 

$

4,846

 

4.93

%

$

127,634

 

$

4,913

 

5.14

%

Real estate construction - residential

 

23,467

 

790

 

4.50

 

21,058

 

928

 

5.89

 

Real estate construction - commercial

 

46,173

 

1,653

 

4.79

 

42,967

 

1,382

 

4.30

 

Real estate mortgage - residential

 

218,226

 

8,274

 

5.07

 

217,919

 

8,841

 

5.42

 

Real estate mortgage - commercial

 

392,609

 

14,401

 

4.90

 

404,826

 

15,709

 

5.18

 

Consumer

 

23,579

 

1,118

 

6.34

 

28,176

 

1,374

 

6.51

 

Total loans

 

$

835,579

 

$

31,082

 

4.97

%

$

842,580

 

$

33,147

 

5.25

%

Investment securities: (3)

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasury

 

$

1,503

 

$

17

 

1.51

%

$

2,053

 

$

24

 

1.56

%

Government sponsored enterprises

 

68,147

 

613

 

1.20

 

73,771

 

796

 

1.44

 

Asset backed securities

 

119,349

 

2,026

 

2.27

 

115,227

 

2,363

 

2.74

 

State and municipal

 

35,168

 

989

 

3.76

 

34,092

 

1,058

 

4.15

 

Total investment securities

 

$

224,167

 

$

3,645

 

2.17

%

$

225,143

 

$

4,241

 

2.52

%

Restricted investments

 

4,036

 

62

 

2.05

 

4,308

 

79

 

2.45

 

Federal funds sold and other overnight interest-bearing deposits

 

17,388

 

35

 

0.27

 

20,294

 

42

 

0.28

 

Total interest earning assets

 

$

1,081,170

 

$

34,824

 

4.31

%

$

1,092,325

 

$

37,509

 

4.59

%

All other assets

 

102,849

 

 

 

 

 

104,223

 

 

 

 

 

Allowance for loan losses

 

(15,229

)

 

 

 

 

(14,707

)

 

 

 

 

Total assets

 

$

1,168,790

 

 

 

 

 

$

1,181,841

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW accounts

 

$

195,178

 

$

403

 

0.28

%

$

186,933

 

$

529

 

0.38

%

Savings

 

74,751

 

59

 

0.11

 

65,862

 

56

 

0.11

 

Money market

 

159,602

 

290

 

0.24

 

152,090

 

334

 

0.29

 

Time deposits of $100,000 and over

 

118,515

 

706

 

0.80

 

130,887

 

833

 

0.85

 

Other time deposits

 

261,701

 

2,274

 

1.16

 

278,305

 

2,769

 

1.33

 

Total time deposits

 

$

809,747

 

$

3,732

 

0.62

%

$

814,077

 

$

4,521

 

0.74

%

Federal funds purchased and securities sold under agreements to repurchase

 

19,997

 

17

 

0.11

 

23,271

 

17

 

0.10

 

Subordinated notes

 

49,486

 

963

 

2.60

 

49,486

 

1,045

 

2.82

 

Federal Home Loan Bank advances

 

23,003

 

315

 

1.83

 

28,323

 

402

 

1.90

 

Total borrowings

 

$

92,486

 

$

1,295

 

1.87

%

$

101,080

 

$

1,464

 

1.93

%

Total interest bearing liabilities

 

$

902,233

 

$

5,027

 

0.74

%

$

915,157

 

$

5,985

 

0.87

%

Demand deposits

 

176,861

 

 

 

 

 

160,765

 

 

 

 

 

Other liabilities

 

7,424

 

 

 

 

 

8,086

 

 

 

 

 

Total liabilities

 

1,086,518

 

 

 

 

 

1,084,008

 

 

 

 

 

Stockholders’ equity

 

82,272

 

 

 

 

 

97,833

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

1,168,790

 

 

 

 

 

$

1,181,841

 

 

 

 

 

Net interest income (FTE)

 

 

 

29,797

 

 

 

 

 

31,524

 

 

 

Net interest spread

 

 

 

 

 

3.57

%

 

 

 

 

3.72

%

Net interest margin

 

 

 

 

 

3.68

%

 

 

 

 

3.85

%

 

41



 


(1)         Interest income and yields are presented on a fully taxable equivalent basis using the Federal statutory income tax rate of 34%, net of nondeductible interest expense. Such adjustments totaled $388,000 and $416,000 for the nine months ended September 30, 2013 and 2012, respectively.

(2)         Non-accruing loans are included in the average amounts outstanding.

(3)         Average balances are based on amortized cost.

(4)        Fees and costs on loans are included in interest income.

 

42



 

Rate and volume analysis

 

The following table summarizes the changes in net interest income on a fully taxable equivalent basis, by major category of interest earning assets and interest bearing liabilities, identifying changes related to volumes and rates for the three and nine months ended September 30, 2013 compared to September 30, 2012. The change in interest due to the combined rate/volume variance has been allocated to rate and volume changes in proportion to the absolute dollar amounts of change in each.

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2013 vs. 2012

 

2013 vs. 2012

 

 

 

 

 

Change due to

 

 

 

Change due to

 

 

 

Total

 

Average

 

Average

 

Total

 

Average

 

Average

 

(In thousands)

 

Change

 

Volume

 

Rate

 

Change

 

Volume

 

Rate

 

Interest income on a fully taxable equivalent basis: (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans: (2) (4)

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

21

 

$

116

 

$

(95

)

$

(67

)

$

147

 

$

(214

)

Real estate construction - residential

 

38

 

29

 

9

 

(138

)

98

 

(236

)

Real estate construction - commercial

 

66

 

43

 

23

 

271

 

108

 

163

 

Real estate mortgage - residential

 

(96

)

(36

)

(60

)

(567

)

12

 

(579

)

Real estate mortgage - commercial

 

(650

)

(227

)

(423

)

(1,308

)

(465

)

(843

)

Consumer

 

(78

)

(90

)

12

 

(256

)

(219

)

(37

)

Investment securities: (3)

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasury

 

(5

)

(3

)

(2

)

(7

)

(6

)

(1

)

Government sponsored entities

 

(32

)

(16

)

(16

)

(183

)

(58

)

(125

)

Asset backed securities

 

(105

)

(16

)

(89

)

(337

)

82

 

(419

)

State and municipal

 

(18

)

1

 

(19

)

(69

)

32

 

(101

)

Restricted investments

 

(2

)

(1

)

(1

)

(17

)

(5

)

(12

)

Federal funds sold and other over-night Interest bearing deposits

 

 

4

 

(4

)

(7

)

(6

)

(1

)

Total interest income

 

(861

)

(196

)

(665

)

(2,685

)

(280

)

(2,405

)

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW accounts

 

(18

)

6

 

(24

)

(126

)

22

 

(148

)

Savings

 

3

 

3

 

 

3

 

8

 

(5

)

Money market

 

(12

)

6

 

(18

)

(44

)

15

 

(59

)

Time deposits of $100,000 and over

 

(73

)

(21

)

(52

)

(127

)

(76

)

(51

)

Other time deposits

 

(445

)

(100

)

(345

)

(495

)

(158

)

(337

)

Federal funds purchased and securities sold under agreements to repurchase

 

 

(1

)

1

 

 

(2

)

2

 

Subordinated notes

 

(23

)

 

(23

)

(82

)

 

(82

)

Federal Home Loan Bank advances

 

(28

)

(15

)

(13

)

(87

)

(74

)

(13

)

Total interest expense

 

(596

)

(122

)

(474

)

(958

)

(265

)

(693

)

Net interest income on a fully taxable equivalent basis

 

$

(265

)

$

(74

)

$

(191

)

$

(1,727

)

$

(15

)

$

(1,712

)

 


(1)         Interest income and yields are presented on a fully taxable equivalent basis using the Federal statutory income tax rate of 34%, net of nondeductible interest expense. Such adjustments totaled $129,000 and $137,000 for the three months ended September 30, 2013 and 2012, respectively, and $388,000 and $416,000 for the nine months ended September 30, 2013 and 2012, respectively.

(2)         Non-accruing loans are included in the average amounts outstanding.

(3)         Average balances are based on amortized cost.

(4)         Fees and costs on loans are included in interest income.

 

Financial results for the three and nine months ended September 30, 2013 compared to the three and nine months ended September 30, 2012 reflected a decrease in net interest income, on a tax equivalent basis, of $265,000, or 2.6%, and $1.7 million, or 5.5%, respectively. The decreases in net interest income are primarily due to lower average earning asset levels and continued contraction of the net interest margin resulting from the prolonged low interest rate environment. Measured as a percentage of average earning assets, the net interest margin (expressed on a fully taxable equivalent basis)

 

43



 

decreased to 3.74% and 3.68% for the three and nine months ended September 30, 2013, respectively, compared to 3.80% and 3.85% for the three and nine months ended September 30, 2012, respectively.

 

Average interest-earning assets decreased $14.8 million, or 1.3%, to $1.06 billion for the quarter ended September 30, 2013 compared to $1.07 billion for the quarter ended September 30, 2012, and average interest bearing liabilities decreased $19.7 million, or 2.2%, to $884.6 million for the quarter ended September 30, 2013 compared to $904.3 million for the quarter ended September 30, 2012.

 

Average interest-earning assets decreased $11.1 million, or 1.0%, to $1.08 billion for the nine months ended September 30, 2013 compared to $1.09 billion for the nine months ended September 30, 2012, and average interest bearing liabilities decreased $12.9 million, or 1.4%, to $902.2 million for the nine months ended September 30, 2013 compared to $915.1 million for the nine months ended September 30, 2012.

 

Total interest income decreased to $11.4 million and $34.8 million for the three and nine months ended September 30, 2013, respectively, compared to $12.3 million and $37.5 million for the three and nine months ended September 30, 2012, respectively. The Company’s rates earned on interest earning assets wer 4.28% and 4.31% for the three and nine months ended September 30, 2013, respectively, compared to 4.55% and 4.59% for the three and nine months ended September 30, 2012, respectively.

 

Interest income on loans decreased 6.4% to $10.2 million for the quarter ended September 30, 2013 compared to $10.9 million for the quarter ended September 30, 2012. Average loans outstanding decreased $10.0 million, or 1.2%, to $831.2 million for the quarter ended September 30, 2013 compared to $841.1 million for the quarter ended September 30, 2012. The average yield on loans receivable decreased to 4.87% during the quarter ended September 30, 2013 compared to 5.16% for the quarter ended September 30, 2012 primarily as a result of decreasing market interest rates.

 

For the nine months ended September 30, 2013, interest income on loans decreased 6.2% to $31.1 million compared to $33.1 million for the nine months ended September 30, 2012. Average loans outstanding decreased $7.0 million, or 0.8%, to $835.6 million for the nine months ended September 30, 2013 compared to $842.6 million for the nine months ended September 30, 2012. The average yield on loans decreased to 4.97% for the nine months ended September 30, 2013 compared to 5.25% for the nine months ended September 30, 2012. See the Lending and Credit Management section for further discussion of changes in the composition of the lending portfolio.

 

Total interest expense decreased to $1.4 million and $5.0 million for the three and nine months ended September 30, 2013, respectively, compared to $2.0 million and $6.0 million for the three and nine months ended September 30, 2012, respectively. The Company’s rates paid on interest bearing liabilities was 0.64% and 0.74% for the three and nine months ended September 30, 2013, respectively, compared to 0.89% and 0.87% for the three and nine months ended September 30, 2012, respectively. On January 1, 2012, the Company recorded a $368,000 credit to interest expense on time deposits for imputed capitalized interest not accounted for during the time period of 2004 through 2011 on the construction of the Company’s new bank buildings. This is considered a correction of an immaterial prior period error. Without this credit to interest expense, rates paid on interest bearing liabilities would have been approximately 0.92% for the nine months ended September 30, 2012.  See the Liquidity Management section for further discussion.

 

Interest expense on deposits decreased to $997,000 for the quarter ended September 30, 2013 compared to $1.5 million for the quarter ended September 30, 2012. Average time deposits decreased $14.5 million, or 1.8%, to $787.9 million for the quarter ended September 30, 2013 compared to $802.4 million for the quarter ended September 30, 2012. The average cost of deposits decreased to 0.50% during the quarter ended September 30, 2013 compared to 0.76% for the quarter ended September 30, 2012 primarily as a result of lower market interest rates, and approximately $23.0 million from a 58 month 6.05% certificate of deposit special that matured during the third quarter of 2013.

 

For the nine months ended September 30, 2013, interest expense on deposits decreased to $3.7 million compared to $4.5 million for the nine months ended September 30, 2012. Average time deposits decreased $4.3 million, or 0.5%, to $809.7 million for the nine months ended September 30, 2013 compared to $814.1 million for the nine months ended September 30, 2012. The cost of deposits decreased to 0.62% for the nine months ended September 30, 2012 to 0.74% for the nine months ended September 30, 2013.

 

Interest expense on borrowings decreased to $436,000 and $1.3 million for the three and nine months ended September 30, 2013, respectively, compared to $487,000 and $1.5 million for the three and nine months ended September 30, 2012, respectively. Average borrowings decreased $5.2 million to $96.6 million for the three months ended September 30, 2013 compared to $101.9 million for the three months ended September 30, 2012, and decreased $8.6 million to $92.5 million

 

44



 

for the nine months ended September 30, 2013 compared to $101.1 million for the nine months ended September 30, 2012. See the Liquidity Management section for further discussion.

 

Non-interest Income and Expense

 

Non-interest income for the three and nine months ended September 30, 2013 and 2012 was as follows:

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

(Dollars in thousands)

 

2013

 

2012

 

$
Change

 

%
Change

 

2013

 

2012

 

$
Change

 

%
Change

 

Non-interest Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

$

1,463

 

$

1,360

 

$

103

 

$

7.6

$

4,213

 

$

4,067

 

$

146

 

$

3.6

%

Trust department income

 

179

 

234

 

(55

)

(23.5

)

598

 

670

 

(72

)

(10.7

)

Real estate servicing fees, net

 

338

 

(62

)

400

 

(645.2

)

760

 

(348

)

1,108

 

(318.4

)

Gain on sales of mortgage loans

 

175

 

779

 

(604

)

(77.5

)

1,515

 

1,773

 

(258

)

(14.6

)

Gain on sales of investment securities

 

0

 

26

 

(26

)

NM

 

554

 

26

 

528

 

NM

 

Other

 

292

 

343

 

(51

)

(14.9

)

903

 

905

 

(2

)

(0.2

)

Total non-interest income

 

$

2,447

 

$

2,680

 

$

(233

)

$

(8.7

)% 

$

8,543

 

$

7,093

 

$

1,450

 

$

20.4

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest income as a % of total revenue *

 

19.9

%

20.9

%

 

 

 

 

22.5

%

18.6

%

 

 

 

 

Total revenue per full time equivalent employee

 

$

35.6

 

$

36.6

 

 

 

 

 

$

109.7

 

$

109.1

 

 

 

 

 

 


* Total revenue is calculated as net interest income plus non-interest income.

 

Total non-interest income decreased $233,000, or 8.7%, to $2.4 million for the quarter ended September 30, 2013 compared to $2.7 million for the quarter ended September 30, 2012, and increased $1.4 million, or 20.4%, to $8.5 million for the nine months ended September 30, 2013 compared to $7.1 million for the nine months ended September 30, 2012. On January 1, 2012, the Company opted to measure mortgage servicing rights (MSRs) at fair value as permitted by Accounting Standards Codification (ASC) Topic 860-50 Accounting for Servicing Financial Assets. The election of this option resulted in the recognition of a cumulative effect of change in accounting principle of $459,890, which was recorded as an increase to beginning retained earnings, as further described in Note 5 to the consolidated financial statements. As such, effective January 1, 2012, the change in the fair value of mortgage servicing rights is recognized in earnings as other noninterest income for the period in which the change occurs.

 

Real estate servicing fees, net increased $400,000 to $338,000 for the quarter ended September 30, 2013 compared to the quarter ended September 30, 2012, and increased $1.1 million to $760,000 for the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012. Net real estate servicing fees include mortgage loan servicing fees and the gains or losses due to the change in fair value of MSRs arising from inputs and assumptions. Mortgage loan servicing fees earned on loans sold were $214,000 and $674,000 for the three months and nine months ended September 30, 2013, respectively, compared to $211,000 and $637,000 for the comparable 2012 periods, respectively. Total gains or losses recognized were $123,000 and $86,000 for the three and nine months ended September 30, 2013, respectively, compared to ($273,000) and ($985,000) for the comparable 2012 periods. The net losses recognized in 2012 included a one time adjustment of $538,000 correction of an immaterial prior period error due to changing from the straight-line amortization method to an accelerated amortization method of accounting for amortizing MSRs in prior years.

 

Gain on sales of mortgage loans decreased $604,000 to $175,000 for the quarter ended September 30, 2013 compared to the quarter ended September 30, 2012, and decreased $258,000 to $1.5 million for the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012. The Company’s loans sold decreased from $27.3 million for the quarter ended September 30, 2012 to $12.6 million for the quarter ended September 30, 2013, and decreased from $68.5 million for the nine months ended September 30, 2012 to $63.4 million for the nine months ended September 30, 2013. Refinancing activity impacting both the volume of loans sold and gains recognized began to slow down during the third quarter of 2013 due to rising interest rates. During the third quarter of 2013, the Company increased its repurchase reserve liability by $150,000 for estimated losses incurred on sold loans that is included in total gain on sales of mortgage loans. The Company was servicing $323.0 million of mortgage loans at September 30, 2013 compared to $306.5 million at September 30, 2012.

 

45



 

Gain on sale of investment securities During the nine months ended September 30, 2013, the Company received $22,115,000 from proceeds on sales of available-for-sale debt securities and recognized gains of $554,000. These transactions were the result of bond sales and purchases to replace several smaller holdings with fewer, larger investments without materially changing the duration or yield of the investment portfolio.

 

Non-interest expense for the three and nine months ended September 30, 2013 and 2012 was as follows:

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

(Dollars in thousands)

 

2013

 

2012

 

$
Change

 

%
Change

 

2013

 

2012

 

$
Change

 

%
Change

 

Non-interest Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries

 

$

3,658

 

$

3,666

 

$

(8

)

$

(0.2

)%

$

11,023

 

$

10,754

 

$

269

 

$

2.5

%

Employee benefits

 

1,205

 

1,095

 

110

 

10.0

 

3,573

 

3,711

 

(138

)

(3.7

)

Occupancy expense, net

 

695

 

666

 

29

 

4.4

 

1,973

 

1,953

 

20

 

1.0

 

Furniture and equipment expense

 

474

 

431

 

43

 

10.0

 

1,438

 

1,403

 

35

 

2.5

 

FDIC insurance assessment

 

253

 

249

 

4

 

1.6

 

753

 

752

 

1

 

0.1

 

Legal, examination, and professional fees

 

207

 

284

 

(77

)

(27.1

)

727

 

880

 

(153

)

(17.4

)

Advertising and promotion

 

310

 

288

 

22

 

7.6

 

907

 

750

 

157

 

20.9

 

Postage, printing, and supplies

 

308

 

274

 

34

 

12.4

 

854

 

817

 

37

 

4.5

 

Processing expense

 

749

 

888

 

(139

)

(15.7

)

2,758

 

2,667

 

91

 

3.4

 

Other real estate expense

 

1,265

 

1,725

 

(460

)

(26.7

)

4,437

 

3,174

 

1,263

 

39.8

 

Other

 

848

 

812

 

36

 

4.4

 

2,745

 

3,094

 

(349

)

(11.3

)

Total non-interest expense

 

$

9,972

 

$

10,378

 

$

(406

)

$

(3.9

)%

$

31,188

 

$

29,955

 

$

1,233

 

$

4.1

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Efficiency ratio

 

81.0

%

81.1

%

 

 

 

 

82.2

%

78.4

%

 

 

 

 

Salaries and benefits as a % of total non-interest expense

 

48.8

 

45.9

 

 

 

 

 

46.8

 

48.3

 

 

 

 

 

Number of full-time equivalents employees

 

346

 

350

 

 

 

 

 

346

 

350

 

 

 

 

 

 

Total non-interest expense decreased $406,000, or 3.9%, to $10.0 million for the quarter ended September 30, 2013 compared to the quarter September 30, 2012, and increased $1.2 million, or 4.1%, to $31.2 million for the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012.

 

Employee benefits increased $110,000, or 10.0%, for the quarter ended September 30, 2013 compared to the quarter ended September 30, 2012, and decreased $138,000, or 3.7%, for the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012. The increase in the current quarter over the prior year quarter primarily resulted from an $83,000 increase in estimated profit sharing and pension expense accruals and a $35,000 increase in medical insurance premiums. The decrease in the nine months ended September 30, 2013 over the nine months ended September 30, 2012 primarily resulted from a $121,000 decrease in estimated profit sharing and pension expense accruals and an $89,000 decrease in other employee benefits, partially offset by a $97,000 increase in medical insurance premiums.

 

Legal, examination, and professional fees decreased $77,000, or 27.1%, for the quarter ended September 30, 2013 compared to the quarter ended September 30, 2012, and decreased $153,000, or 17.4%, for the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012. The decrease for the quarter ended September 30, 2013 over the quarter ended September 30, 2012 primarily consisted of a $22,000 decrease in legal fees and a $27,000 decrease in consulting fees, and a $30,000 decrease in audit fees. The decrease for the nine months ended September 30, 2013 over the nine months ended September 30, 2012 primarily consisted of an $85,000 decrease in legal fees and a $72,000 decrease in audit fees that was partially offset by a $7,000 increase in consulting fees. The decrease in legal fees for the three and nine months ended September 30, 2013 over the comparable periods 2012, was primarily a result of a decrease in litigation fees related to two legal suits incurred during the first nine months of 2012. The decrease in auditing fees was primarily due to nonrecurring fees incurred in 2012 for tax and fair value analysis. The increase in consulting fees during the nine months ended September 30, 2013 was primarily due to a deposit product review project and various additional new consulting projects.

 

46



 

Advertising and promotion increased $22,000, or 7.6%, for the quarter ended September 30, 2013 compared to the quarter ended September 30, 2012, and increased $157,000, or 20.9%, for the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012. The increase for both the three and nine months ended September 30, 2013 was primarily due to additional advertising projects and payment for several sponsorships and promotional items that were not incurred during 2012.

 

Processing expense decreased $139,000, or 15.7%, for the quarter ended September 30, 2013 compared to the quarter ended September 30, 2012, and increased $91,000, or 3.4% for the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012. The decrease quarter over quarter was primarily due to contract savings resulting in lower core processing expenses. The increase in processing expense during the nine months ended September 30, 2013 was primarily due to a one time consulting fee incurred to negotiate reduced future core processing expenses. A portion of this fee is being amortized over the new contract period with the Company’s core processing vendor.

 

Other real estate (ORE) expense decreased $460,000, or 26.7%, to $1.3 million for the quarter ended September 30, 2013 compared to the quarter ended September 30, 2012, and increased $1.3 million, or 39.8%, to $4.4 million for the nine months ended September 30, 2013 compared to September 30, 2012. The expense provision for valuation write-downs taken on ORE was $847,000 and $3.1 million for the three and nine months ended September 30, 2013, respectively, compared to $1.1 million and $1.8 million for the three and nine months ended September 30, 2012, respectively. The significant increase in the expense provision during 2013 primarily related to two hotels located in the Branson area that were sold at auction during the second quarter of 2013. Expenses incurred to maintain foreclosed properties were $260,000 and $1.3 million for the three months and nine months ended September 30, 2013, respectively, compared to $786,000 and $1.6 million for the same periods in 2012. The Company began to see a decrease in operating costs during the third quarter of 2013 due to the sale of the hotels.

 

Other non-interest expense increased $36,000, or 4.4%, for the quarter ended September 30, 2013 compared to the quarter ended September 30, 2012, and decreased $349,000, or 11.3%, for the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012. The increase for the quarter ended September 30, 2013 was primarily due to a $54,000 increase in debit card charge-offs, an $80,000 increase in repossessed asset and loan expenses, partially offset by a $100,000 decrease in CDI amortization. The decrease for the nine months ended September 30, 2013 was primarily due to two property donations totaling $309,000 to charitable organizations during the first and second quarter of 2012 that were both in other real estate owned, and $179,000 decrease in CDI amortization. These decreases were partially offset by $239,000 impairment write-downs on repossessed assets taken in the second and third quarter of 2013.

 

Income taxes

 

Income taxes as a percentage of earnings before income taxes as reported in the consolidated financial statements were 33.0% for the quarter ended September 30, 2013 compared to 30.9% for the quarter ended September 30, 2012. Income taxes as a percentage of earnings before income taxes as reported in the consolidated financial statements were 31.9% for the nine months ended September 30, 2013 compared to (78.9)% for the nine months ended September 30, 2012. Excluding an immaterial correction of a prior period error of $371,000, income taxes as a percentage of earnings before income taxes would have been 18.9% for the nine months ended September 30, 2012. The Company had not recognized any tax liabilities or any interest or penalties in income tax expense related to uncertain tax positions as of September 30, 2013 and 2012.

 

Lending and Credit Management

 

Interest earned on the loan portfolio is a primary source of interest income for the Company. Net loans represented 71.5% of total assets as of September 30, 2013 compared to 70.4% as of December 31, 2012.

 

Lending activities are conducted pursuant to an established loan policy approved by the Bank’s Board of Directors. The Bank’s credit review process is overseen by regional loan committees with established loan approval limits. In addition, a senior loan committee reviews all credit relationships in aggregate over an established dollar amount. The senior loan committee meets weekly and are comprised of senior managers of the Bank.

 

47



 

A summary of loans, by major class within the Company’s loan portfolio as of the dates indicated is as follows:

 

 

 

September 30,

 

 

 

December 31,

 

 

 

(In thousands)

 

2013

 

 

 

2012

 

 

 

Commercial, financial, and agricultural

 

$

132,923

 

16.2

%

$

130,040

 

15.4

%

Real estate construction - residential

 

23,664

 

2.9

 

22,177

 

2.6

 

Real estate construction - commercial

 

48,489

 

5.9

 

43,486

 

5.1

 

Real estate mortgage - residential

 

220,174

 

26.8

 

221,223

 

26.1

 

Real estate mortgage - commercial

 

375,876

 

45.7

 

405,092

 

47.8

 

Installment loans to individuals

 

21,916

 

2.5

 

24,966

 

3.0

 

Total loans

 

$

823,042

 

100.0

%

$

846,984

 

100.0

%

 

The Company’s loan portfolio decreased $23.4 million, or 2.8%, from December 31, 2012 to September 30, 2013. During the nine months ended September 30, 2013 there were no significant increases in loan demand.

 

The Company extends credit to its local community market through traditional real estate mortgage products. The Company does not participate in extending credit to sub-prime residential real estate markets. The Company does not lend funds for the type of transactions defined as “highly leveraged” by bank regulatory authorities or for foreign loans. Additionally, the Company does not have any concentrations of loans exceeding 10% of total loans that are not otherwise disclosed in the loan portfolio composition table. The Company does not have any interest-earning assets that would have been included in nonaccrual, past due, or restructured loans if such assets were loans.

 

The Company generally does not retain long-term fixed rate residential mortgage loans in its portfolio. Fixed rate loans conforming to standards required by the secondary market are offered to qualified borrowers, but are not funded until the Company has a non-recourse purchase commitment from the secondary market at a predetermined price. For the nine months ended September 30, 2013, the Company sold approximately $63.4 million of loans to investors compared to $68.5 million for the nine months ended September 30, 2012. At September 30, 2013, the Company was servicing approximately $323.0 million of loans sold to the secondary market compared to $310.0 million at December 31, 2012, and $307.0 million at September 30, 2012.

 

Real estate mortgage loans retained in the Company’s portfolio generally include provisions for rate adjustments at one to five year intervals. Commercial loans and real estate construction loans generally have maturities of less than one year. Installment loans to individuals are primarily fixed rate loans with maturities from one to five years.

 

Risk Elements of the Loan Portfolio

 

Management, the senior loan committee, and internal loan review, formally review all loans in excess of certain dollar amounts (periodically established) at least annually. Currently, loans in excess of $2.0 million in aggregate and all adversely classified credits identified by management are reviewed. In addition, all other loans are reviewed on a sample basis. The senior loan committee reviews and reports to the board of directors, on a monthly basis, past due, classified, and watch list loans in order to classify or reclassify loans as loans requiring attention, substandard, doubtful, or loss. During this review, management also determines which loans should be considered impaired. Management follows the guidance provided in the FASB’s ASC Topic 310, Accounting by Creditors for Impairment of a Loan, in identifying and measuring loan impairment. If management determines that it is probable that all amounts due on a loan will not be collected under the original terms of the loan agreement, the loan is considered to be impaired. These loans are evaluated individually for impairment, and in conjunction with current economic conditions and loss experience, specific reserves are estimated as further discussed below. Loans not individually evaluated are aggregated and reserves are recorded using a consistent methodology that considers historical loan loss experience by loan type, delinquencies, current economic conditions, loan risk ratings and industry concentration. Management believes, but there can be no assurance, that these procedures keep management informed of potential problem loans. Based upon these procedures, both the allowance and provision for loan losses are adjusted to maintain the allowance at a level considered necessary by management to provide for probable losses inherent in the loan portfolio.

 

48



 

Nonperforming Assets

 

The following table summarizes nonperforming assets at the dates indicated:

 

 

 

September 30,

 

December 31,

 

(In thousands)

 

2013

 

2012

 

Nonaccrual loans:

 

 

 

 

 

Commercial, financial, and agricultural

 

$

2,028

 

$

1,335

 

Real estate construction - residential

 

2,255

 

2,497

 

Real estate construction - commercial

 

7,101

 

7,762

 

Real estate mortgage - residential

 

4,372

 

5,330

 

Real estate mortgage - commercial

 

12,591

 

13,938

 

Installment loans to individuals

 

263

 

219

 

Total

 

$

28,610

 

$

31,081

 

 

 

 

 

 

 

Loans contractually past - due 90 days or more and still accruing:

 

 

 

 

 

Commercial, financial, and agricultural

 

$

15

 

$

0

 

Real estate construction - residential

 

0

 

0

 

Real estate construction - commercial

 

0

 

0

 

Real estate mortgage - residential

 

377

 

0

 

Real estate mortgage - commercial

 

0

 

0

 

Installment loans to individuals

 

14

 

6

 

Total

 

$

406

 

$

6

 

Troubled debt restructurings - accruing

 

7,566

 

8,282

 

Total nonperforming loans

 

36,582

 

39,369

 

Other real estate owned

 

15,664

 

23,124

 

Foreclosed assets

 

204

 

468

 

Total nonperforming assets

 

$

52,450

 

$

62,961

 

 

 

 

 

 

 

Loans

 

$

823,042

 

$

846,984

 

Allowance for loan losses to loans

 

1.73

%

1.75

%

Nonperforming loans to loans

 

4.44

%

4.65

%

Allowance for loan losses to nonperforming loans

 

38.96

%

37.70

%

Nonperforming assets to loans, other real estate owned and foreclosed assets

 

6.25

%

7.23

%

 

Total nonperforming assets decreased $10.5 million, or 16.7%, from December 30, 2012 to September 30, 2013. As detailed below, this decrease includes a decrease of $7.7 million, or 32.7%, due to sales and impairment write-downs of other real estate owned and repossessed assets, a $2.5 million, or 7.9%, decrease in nonaccrual loans, and a $716,000, or 8.6%, decrease in accruing troubled debt restructurings (TDRs).

 

Nonperforming loans, defined as loans on nonaccrual status, loans 90 days or more past due and still accruing, and TDRs totaled $36.6 million, or 4.44%, of total loans at September 30, 2013 compared to $39.3 million, or 4.65%, of total loans at December 31, 2012.

 

It is the Company’s policy to discontinue the accrual of interest income on loans when management believes that the borrower’s financial condition, after consideration of business conditions and collection efforts, is such that the collection of interest is doubtful, or upon which principal or interest due has been in default for a period of 90 days or more and the asset is not both well secured and in the process of collection. Subsequent interest payments received on such loans are applied to principal if any doubt exists as to the collectability of such principal; otherwise, such receipts are recorded as interest income on a cash basis. Interest on nonaccrual loans, which would have been recorded under the original terms of the loans, was approximately $660,000 and $966,000 for the nine months ended September 30, 2013 and 2012, respectively.

 

As of September 30, 2013 and December 31, 2012, approximately $26.7 million and $17.6 million, respectively, of loans classified as substandard, not included in the nonperforming asset table, were identified as potential problem loans having more than normal risk which raised doubts as to the ability of the borrower to comply with present loan repayment terms. Even though borrowers are experiencing moderate cash flow problems as well as some deterioration in collateral value, management believes the general allowance was sufficient to cover the risks and probable losses related to such loans at September 30, 2013 and December 31, 2012, respectively.

 

49



 

Total non-accrual loans at September 30, 2013 decreased $2.5 million to $28.6 million from December 31, 2012. This decrease primarily consisted of a $2.3 million decrease in real estate mortgage non-accrual loans and a net decrease of $661,000 in real estate construction loans. This decrease was partially offset by a $693,000 increase in commercial, financial, and agricultural loans. At September 30, 2013 and December 31, 2012, real estate mortgage — commercial non-accrual loans made up 45% of total non-accrual loans.

 

Loans past due 90 days and still accruing interest at September 30, 2013 increased $400,000 to $406,000 from December 31, 2012. Other real estate owned and repossessed assets at September 30, 2013 decreased $7.7 million to $15.9 million from December 31, 2012 primarily due to the sale of two hotels located in the Branson area and land held in foreclosed property in the Company’s real-estate subsidiary. During the nine months ended September 30, 2013, $3.3 million of nonaccrual loans, net of charge-offs taken, moved to other real estate owned and repossessed assets, and a net $3.0 million additional provision to the valuation allowance was recorded to reflect current fair values compared to a $1.8 million provision during the nine months ended September 30, 2012.

 

The following table summarizes the Company’s TDRs at the dates indicated:

 

 

 

September 30, 2013

 

December 31, 2012

 

(In thousands)

 

Number of
contracts

 

Recorded
Investment

 

Specific
Reserves

 

Number of
contracts

 

Recorded
Investment

 

Specific
Reserves

 

TDRs - Accrual

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial, financial and agricultural

 

9

 

$

2,364

 

$

100

 

12

 

$

2,820

 

$

104

 

Real estate mortgage - residential

 

4

 

844

 

69

 

3

 

440

 

94

 

Real estate mortgage - commercial

 

4

 

4,358

 

211

 

6

 

5,022

 

111

 

Total TDRs - Accrual

 

17

 

$

7,566

 

$

380

 

21

 

$

8,282

 

$

309

 

TDRs - Non-accrual

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial, financial and agricultural

 

3

 

$

115

 

$

10

 

2

 

$

201

 

$

14

 

Real estate construction - commercial

 

2

 

4,555

 

250

 

5

 

5,693

 

468

 

Real estate mortgage - residential

 

5

 

643

 

90

 

9

 

1,177

 

142

 

Real estate mortgage - commercial

 

9

 

6,349

 

604

 

12

 

6,966

 

611

 

Consumer

 

2

 

44

 

6

 

2

 

44

 

0

 

Total TDRs - Non-accrual

 

21

 

$

11,706

 

$

960

 

30

 

$

14,081

 

$

1,235

 

Total TDRs

 

38

 

$

19,272

 

$

1,340

 

51

 

$

22,363

 

$

1,544

 

 

At September 30, 2013, loans classified as TDRs totaled $19.3 million, of which $11.7 million were on non-accrual status and $7.6 million were on accrual status. At December 31, 2012, loans classified as TDRs totaled $22.4 million, of which $14.1 million were on non-accrual status and $8.3 million were on accrual status. The $3.1 million net decrease in total TDRs from December 31, 2012 was a primarily due to $504,000 charged off and approximately $2.7 million of payments received. The increase in TDRs classified as real estate mortgage - residential accruing loans primarily related to one new loan relationship modified to interest only payments. The decrease in TDRs classified as real estate mortgage - commercial accruing loans consisted of one loan relationship that transferred from accruing TDRs to non-accrual TDRs. The decrease in real estate construction and real estate mortgage non-accrual TDRs is primarily related to $1.8 million in payoffs due to property sales.

 

Provision and Allowance for Loan Losses

 

As mentioned above, the Company is continuing to recover from the deterioration of collateral values during the prior and current economic conditions. Current appraisals are being obtained and management has adjusted the provision to reflect the amounts determined necessary to maintain the allowance for loan losses at a level necessary to cover probable losses in the loan portfolio. The allowance for loan losses was $14.2 million, or 1.73%, of loans outstanding at September 30, 2013 compared to $14.8 million, or 1.75%, of loans outstanding at December 31, 2012, and $16.9 million, or 2.01%, of loans outstanding at September 30, 2012.

 

50



 

The following table summarizes loan loss experience for the periods ended as indicated:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

(In thousands)

 

2013

 

2012

 

2013

 

2012

 

Analysis of allowance for loan losses:

 

 

 

 

 

 

 

 

 

Balance beginning of period

 

$

15,358

 

$

15,314

 

$

14,842

 

$

13,809

 

Net charge-offs (recoveries):

 

 

 

 

 

 

 

 

 

Commercial, financial, and agricultural

 

453

 

724

 

552

 

713

 

Real estate construction - residential

 

 

 

119

 

(67

)

Real estate construction - commercial

 

135

 

 

133

 

(23

)

Real estate mortgage - residential

 

329

 

22

 

670

 

508

 

Real estate mortgage - commercial

 

144

 

2,270

 

999

 

3,449

 

Installment loans to individuals

 

43

 

78

 

115

 

209

 

Net charge-offs

 

1,104

 

3,094

 

2,588

 

4,789

 

Provision for loan losses

 

 

4,700

 

2,000

 

7,900

 

Balance end of period

 

$

14,254

 

$

16,920

 

$

14,254

 

$

16,920

 

 

Net Loan Charge-offs

 

The Company’s net loan charge-offs were $1.1 million, or 0.17% of average loans, for the quarter ended September 30, 2013 compared to net loan charge-offs of $3.1 million, or 0.37% of average loans, for the quarter ended September 30, 2012. Real estate mortgage — residential net charge-offs represented 35% of total net charge-offs during the three months ended September 30, 2013 compared to 46% of total net charge-offs during the three months ended September 30, 2012. Commercial, financial, and agricultural net charge-offs increased to 42% of total net charge-offs during the three months ended September 30, 2013 compared to 5% of net charge-offs during the three months ended September 30, 2012, and real estate mortgage - commercial net charge-offs decreased to 9% of total net charge-offs during the three months ended September 30, 2013 compared to 48% of total net charge-offs during the three months ended September 30, 2012.

 

The Company’s net loan charge-offs were $2.6 million, or 0.40% of average loans, for the nine months ended September 30, 2013 compared to net loan charge-offs of $4.8 million, or 0.57% of average loans, for the nine months ended September 30, 2012. Real estate mortgage - commercial net charge-offs represented 58% of total net charge-offs during the nine months ended September 30, 2013 compared to 70% of total net charge-offs during the nine months ended September 30, 2012.  Real estate mortgage — residential net charge-offs remained consistent at 23% of total net charge-offs during the nine months ended September 30, 2013 compared to 29% of total net charge-offs during the nine months ended September 30, 2012.

 

Provision

 

The provision for loan losses decreased to $2.0 million for the nine months ended September 30, 2013, respectively, compared to $4.7 million and $7.9 million for the three and nine months ended September 30, 2012, respectively. The Company did not record a provision during the quarter ended September 30, 2013. Due to decreases in historical loss rates based on the Company’s last thirty-six months of charge-off experience, decreases in average loans and reduced levels of nonperforming loans, the Company’s required provision during the period has begun to decrease.

 

51



 

Allowance for loan losses

 

The following table is a summary of the allocation of the allowance for loan losses:

 

 

 

September 30,

 

December 31,

 

(In thousands)

 

2013

 

2012

 

Allocation of allowance for loan losses at end of period:

 

 

 

 

 

Commercial, financial, and agricultural

 

$

2,110

 

$

1,937

 

Real estate construction - residential

 

964

 

732

 

Real estate construction - commercial

 

1,851

 

1,711

 

Real estate mortgage - residential

 

2,131

 

3,387

 

Real estate mortgage - commercial

 

6,977

 

6,834

 

Installment loans to individuals

 

215

 

239

 

Unallocated

 

6

 

2

 

Total

 

$

14,254

 

$

14,842

 

 

The Company’s allowance for loan losses decreased to $14.2 million at September 30, 2013 compared to $14.8 million at December 31, 2012, and $16.9 million at September 30, 2012. The decrease from December 31, 2012 primarily consisted of a $1.3 million decrease in the allocation for real estate mortgage — residential loans, partially offset by a $372,000 increase in real estate construction loans, a $143,000 increase in real estate mortgage — commercial loans, and a $173,000 increase to commercial, financial, and agricultural loans. The ratio of the allowance for loan losses to nonperforming loans was 38.9% at September 30, 2013, compared to 37.7% at December 31, 2012, and 40.1% at September 30, 2012.

 

The following table is a summary of the general and specific allocations of the allowance for loan losses:

 

 

 

September 30,

 

December 31,

 

(In thousands)

 

2013

 

2012

 

Allocation of allowance for loan losses:

 

 

 

 

 

Individually evaluated for impairment - specific reserves

 

$

4,581

 

$

4,020

 

Collectively evaluated for impairment - general reserves

 

9,673

 

10,822

 

Total

 

$

14,254

 

$

14,842

 

 

The specific reserve component applies to loans evaluated individually for impairment. The net carrying value of impaired loans is generally based on the fair values of collateral obtained through independent appraisals and/or internal evaluations, or by discounting the total expected future cash flows. Once the impairment amount is calculated, a specific reserve allocation is recorded. At September 30, 2013, $4.6 million of the Company’s allowance for loan losses was allocated to impaired loans totaling approximately $36.2 million compared to $4.0 million of the Company’s allowance for loan losses allocated to impaired loans totaling approximately $39.4 million at December 31, 2012. Management determined that $12.2 million, or 34%, of total impaired loans required no reserve allocation at September 30, 2013 compared to $14.7 million, or 37%, at December 31, 2012 primarily due to adequate collateral values, acceptable payment history and adequate cash flow ability.

 

The incurred loss component of the general reserve, or loans collectively evaluated for impairment, is determined by applying percentages to pools of loans by asset type. Loans not individually evaluated are aggregated based on similar risk characteristics. Historical loss rates for each risk group, which is updated quarterly, are quantified using all recorded loan charge-offs. Management determined that the previous twelve quarters were reflective of the loss characteristics of the Company’s loan portfolio during the recent economic environment. These historical loss rates for each risk group are used as the starting point to determine allowance provisions. The Company’s methodology includes factors that allow management to adjust its estimates of losses based on the most recent information available. The rates are then adjusted to reflect actual changes and anticipated changes such as changes in specific allowances on loans and real estate acquired through foreclosure, any gains and losses on final disposition of real estate acquired through foreclosure, changes in national and local economic conditions and developments, including general economic and business conditions affecting the Company’s key lending areas, credit quality trends, specific industry conditions within portfolio segments, bank regulatory examination results, and findings of the internal loan review department. These risk factors are generally reviewed and updated quarterly, as appropriate.

 

52



 

The specific and general reserve allocations represent management’s best estimate of probable losses contained in the loan portfolio at the evaluation date. Although the allowance for loan losses is comprised of specific and general allocations, the entire allowance is available to absorb any credit losses.

 

Liquidity and Capital Resources

 

Liquidity Management

 

The role of liquidity management is to ensure funds are available to meet depositors’ withdrawal and borrowers’ credit demands while at the same time maximizing profitability. This is accomplished by balancing changes in demand for funds with changes in the supply of those funds. Liquidity to meet the demands is provided by maturing assets, short-term liquid assets that can be converted to cash and the ability to attract funds from external sources, principally depositors.  Due to the nature of services offered by the Company, management prefers to focus on transaction accounts and full service relationships with customers. Management believes it has the ability to increase deposits at any time by offering rates slightly higher than the market rate.

 

The Company’s Asset/Liability Committee (ALCO), primarily made up of senior management, has direct oversight responsibility for the Company’s liquidity position and profile. A combination of daily, weekly, and monthly reports provided to management detail the following: internal liquidity metrics, composition and level of the liquid asset portfolio, timing differences in short-term cash flow obligations, available pricing and market access to the financial markets for capital, and exposure to contingent draws on the Company’s liquidity.

 

The Company has a number of sources of funds to meet liquidity needs on a daily basis. The Company’s most liquid assets are comprised of available for sale investment securities, federal funds sold, and excess reserves held at the Federal Reserve.

 

 

 

September 30,

 

December 31,

 

(In thousands)

 

2013

 

2012

 

Federal funds sold and other overnight interest-bearing deposits

 

$

1,090

 

$

27,857

 

Available for sale investment securities

 

213,629

 

200,246

 

Total

 

$

214,719

 

$

228,103

 

 

Federal funds sold and resale agreements normally have overnight maturities and are used for general daily liquidity purposes. The fair value of the available for sale investment portfolio was $213.6 million at September 30, 2013 and included an unrealized net loss of $548,000. The portfolio includes projected maturities and mortgage backed securities pay-downs of approximately $8.8 million over the next twelve months, which offer resources to meet either new loan demand or reductions in the Company’s deposit base.

 

The Company pledges portions of its investment securities portfolio to secure public fund deposits, federal funds purchase lines, securities sold under agreements to repurchase, borrowing capacity at the Federal Reserve Bank, and for other purposes required by law. At September 30, 2013 and December 31, 2012, respectively, the Company’s unpledged securities in the available for sale portfolio totaled approximately $59.2 million and $53.8 million, respectively.

 

Total investment securities pledged for these purposes were as follows:

 

 

 

September 30,

 

December 31,

 

(In thousands)

 

2013

 

2012

 

Investment securities pledged for the purpose of securing:

 

 

 

 

 

Federal Reserve Bank borrowings

 

$

3,365

 

$

3,436

 

Federal funds purchased and securities sold under agreements to repurchase

 

30,745

 

31,278

 

Other deposits

 

120,348

 

111,728

 

Total pledged, at fair value

 

$

154,458

 

$

146,442

 

 

Liquidity is available from the Company’s base of core customer deposits, defined as demand, interest checking, savings, and money market deposit accounts. At September 30, 2013, such deposits totaled $592.8 million and represented 62.3% of the Company’s total deposits. These core deposits are normally less volatile and are often tied to other products of the Company through long lasting relationships. Time deposits and certificates of deposit of $100,000 and over totaled $358.6 million at September 30, 2013. These accounts are normally considered more volatile and higher costing representing 37.7% of total deposits at September 30, 2013.

 

53



 

Core deposits at September 30, 2013 and December 31, 2012 were as follows:

 

 

 

September 30,

 

December 31,

 

(In thousands)

 

2013

 

2012

 

Core deposit base:

 

 

 

 

 

Non-interest bearing demand

 

$

179,959

 

$

192,271

 

Interest checking

 

177,771

 

178,121

 

Savings and money market

 

235,116

 

227,581

 

Total

 

$

592,846

 

$

597,973

 

 

Other components of liquidity are the level of borrowings from third party sources and the availability of future credit. The Company’s outside borrowings are comprised of securities sold under agreements to repurchase, Federal Home Loan Bank advances, and subordinated notes. Federal funds purchased are overnight borrowings obtained mainly from upstream correspondent banks with which the Company maintains approved credit lines. As of September 30, 2013, under agreements with these unaffiliated banks, the Bank may borrow up to $40.0 million in federal funds on an unsecured basis and $4.5 million on a secured basis. There was no federal funds purchased outstanding at September 30, 2013. Securities sold under agreements to repurchase are generally borrowed overnight and are secured by a portion of the Company’s investment portfolio. At September 30, 2013, there was $25.0 million in repurchase agreements. The Company may periodically borrow additional short-term funds from the Federal Reserve Bank through the discount window; although no such borrowings were outstanding at September 30, 2013.

 

The Bank is a member of the Federal Home Loan Bank of Des Moines (FHLB). As a member of the FHLB, the Bank has access to credit products of the FHLB. As of September 30, 2013, the Bank had $24.0 million in outstanding borrowings with the FHLB. In addition, the Company has $49.5 million in outstanding subordinated notes issued to wholly-owned grantor trusts, funded by preferred securities issued by the trusts.

 

Borrowings outstanding at September 30, 2013 and December 31, 2012 were as follows:

 

 

 

September 30,

 

December 31,

 

(In thousands)

 

2013

 

2012

 

Borrowings:

 

 

 

 

 

Securities sold under agreements to repurchase

 

$

25,007

 

$

21,058

 

Federal Home Loan Bank advances

 

24,013

 

20,126

 

Subordinated notes

 

49,486

 

49,486

 

Total

 

$

98,506

 

$

90,670

 

 

The Company pledges certain assets, including loans and investment securities to the Federal Reserve Bank, FHLB, and other correspondent banks as security to establish lines of credit and borrow from these entities. Based on the type and value of collateral pledged, the Company may draw advances against this collateral.

 

The following table reflects the advance equivalent of the assets pledged, borrowings, and letters of credit outstanding, in addition to the estimated future funding capacity available to the Company as follows:

 

 

 

September 30,

 

December 31,

 

 

 

2013

 

2012

 

(In thousands)

 

FHLB

 

Federal
Reserve
Bank

 

Federal
Funds
Purchased
Lines

 

Total

 

FHLB

 

Federal
Reserve
Bank

 

Federal
Funds
Purchased
Lines

 

Total

 

Advance equivalent

 

$

256,111

 

$

3,275

 

$

41,250

 

$

300,636

 

$

290,084

 

$

3,344

 

$

16,790

 

$

310,218

 

Advances outstanding

 

(24,013

)

0

 

0

 

(24,013

)

(20,126

)

0

 

0

 

(20,126

)

Total available

 

$

232,098

 

$

3,275

 

$

41,250

 

$

276,623

 

$

269,958

 

$

3,344

 

$

16,790

 

$

290,092

 

 

At September 30, 2013, loans with a market value of $377.1 million were pledged at the Federal Home Loan Bank as collateral for borrowings and letters of credit. At September 30, 2013, investments with a market value of $5.0 million were pledged to secure federal funds purchase lines and borrowing capacity at the Federal Reserve Bank.

 

54



 

Sources and Uses of Funds

 

Cash and cash equivalents were $25.8 million at September 30, 2013 compared to $58.9 million at December 31, 2012. The $33.1 million decrease resulted from changes in the various cash flows produced by operating, investing, and financing activities of the Company, as shown in the accompanying consolidated statement of cash flows for the nine months ended September 30, 2013. Cash flow provided from operating activities consists mainly of net income adjusted for certain non-cash items. Operating activities provided cash flow of $15.6 million for the nine months ended September 30, 2013.

 

Investing activities consisting mainly of purchases, sales and maturities of available for sale securities, and changes in the level of the loan portfolio, provided total cash of $3.3 million. Cash was provided by $34.5 million in proceeds from investment maturities, calls, and pay-downs, $22.1 million in proceeds from sales of investment securities, $17.4 million net decrease in the loan portfolio, and $7.6 million in proceeds received from sales of other real estate owned and repossessed assets, partially offset by $76.5 million in purchases of investment securities.

 

Financing activities used cash of $51.9 million, resulting primarily from a $12.3 million decrease in demand deposits, a $34.7 million decrease in time deposits, $18.2 million to redeem the remaining shares of preferred stock, and $540,000 to redeem the common stock warrant. These decreases were partially offset by a $7.1 million increase in interest-bearing transaction accounts and a $3.9 million net advance from Federal Home Loan Bank. Future short-term liquidity needs arising from daily operations are not expected to vary significantly during 2013.

 

In the normal course of business, the Company enters into certain forms of off-balance sheet transactions, including unfunded loan commitments and letters of credit. These transactions are managed through the Company’s various risk management processes. Management considers both on-balance sheet and off-balance sheet transactions in its evaluation of the Company’s liquidity. The Company had $143.7 million in unused loan commitments and standby letters of credit as of September 30, 2013. Although the Company’s current liquidity resources are adequate to fund this commitment level the nature of these commitments is such that the likelihood of such a funding demand is very low.

 

The Company is a legal entity, separate and distinct from the Bank, which must provide its own liquidity to meet its operating needs. The Company’s ongoing liquidity needs primarily include funding its operating expenses and paying cash dividends to its common and preferred shareholders. The Company paid cash dividends to its common and preferred shareholders totaling approximately $1.2 million for both the nine months ended September 30, 2013 and 2012, respectively. A large portion of the Company’s liquidity is obtained from the Bank in the form of dividends. The Bank declared and paid $15.0 million and $3.0 million in dividends to the Company during each of the nine months ended September 30, 2013 and 2012, respectively. At September 30, 2013 and December 31, 2012, the Company had cash and cash equivalents totaling $952,000 and $1.9 million, respectively.

 

Capital Management

 

The Company and the Bank are subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification of the Company and the Bank are subject to qualitative judgments by the regulators about components, risk-weightings, and other factors.

 

Quantitative measures established by regulations to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier I capital to risk-weighted assets, and of Tier I capital to adjusted-average assets. Management believes, as of September 30, 2013 and December 31, 2012, the Company and the Bank each met all capital adequacy requirements.

 

In July 2013, the federal banking agencies issued final rules to implement the Basel III regulatory capital reforms and changes required by the Dodd-Frank Act. The phase-in period for community banking organizations begins January 1, 2015, while larger institutions (generally those with assets of $250 billion or more) must begin compliance on January 1, 2014. The final rules call for the following capital requirements:

 

·A minimum ratio of common tier 1 capital to risk-weighted assets of 4.5%.

 

·A minimum ratio of tier 1 capital to risk-weighted assets of 6%.

 

·A minimum leverage ratio of 4%.

 

55



 

In addition, the final rules establish a common equity tier 1 capital conservation buffer of 2.5% of risk-weighted assets applicable to all banking organizations. If a banking organization fails to hold capital above the minimum capital ratios and the capital conservation buffer, it will be subject to certain restrictions on capital distributions and discretionary bonus payments. The phase-in period for the capital conservation and countercyclical capital buffers for all banking organizations will begin on January 1, 2016.

 

Under the proposed rules previously issued by the federal banking agencies, accumulated other comprehensive income (AOCI) would have been included in a banking organization’s common equity tier 1 capital. The final rules allow community banks to make a one-time election not to include these new AOCI components in regulatory capital and instead use the existing treatment under the general risk-based capital rules that excludes most AOCI components from regulatory capital. The opt-out election must be made in the first call report or FR Y-9 series report that is filed after the financial institution becomes subject to the final rule.

 

The final rules permanently grandfather non-qualifying capital instruments (such as trust preferred securities and cumulative perpetual preferred stock) issued before May 19, 2010 for inclusion in the tier 1 capital of banking organizations with total consolidated assets less than $15 billion as of December 31, 2009 and banking organizations that were mutual holding companies as of May 19, 2010.

 

The Company is in the process of assessing the impact of these changes in the regulatory ratios on the capital, operations, liquidity and earnings of the Company and Bank.

 

The table below represents actual and required amounts and ratios for the Company and the Bank as of September 30, 2013 and December 31, 2012 as follows:

 

 

 

 

 

 

 

Minimum

 

Well-Capitalized

 

 

 

Actual

 

Capital Requirements

 

Capital Requirements

 

(in thousands)

 

Amount

 

Ratio

 

Amount

 

Ratio

 

Amount

 

Ratio

 

September 30, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

Total capital (to risk-weighted assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

$

132,002

 

15.36

%

$

68,762

 

8.00

%

N.A.

 

N.A.

%

Bank

 

120,511

 

14.21

 

67,862

 

8.00

 

$

84,828

 

10.00

 

Tier I capital (to risk-weighted assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

$

97,914

 

11.39

%

$

34,381

 

4.00

%

N.A.

 

N.A.

%

Bank

 

109,868

 

12.95

 

33,931

 

4.00

 

$

50,897

 

6.00

 

Tier I capital (to adjusted average assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

$

97,914

 

8.56

%

$

34,312

 

3.00

%

$

N.A.

 

N.A.

%

Bank

 

109,868

 

9.71

 

33,944

 

3.00

 

56,573

 

5.00

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

Total capital (to risk-weighted assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

$

148,889

 

16.83

%

$

70,759

 

8.00

%

N.A.

 

N.A.

%

Bank

 

131,126

 

15.12

 

69,375

 

8.00

 

$

86,715

 

10.00

 

Tier I capital (to risk-weighted assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

$

120,138

 

13.58

%

$

35,380

 

4.00

%

N.A.

 

N.A.

%

Bank

 

120,243

 

13.87

 

34,686

 

4.00

 

$

52,029

 

6.00

 

Tier I capital (to adjusted average assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

$

120,138

 

10.37

%

$

34,762

 

3.00

%

$

N.A.

 

N.A.

%

Bank

 

120,243

 

10.60

 

34,037

 

3.00

 

56,729

 

5.00

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Interest Sensitivity

 

Market risk arises from exposure to changes in interest rates and other relevant market rate or price risk. The Company faces market risk in the form of interest rate risk through transactions other than trading activities. The Company uses financial modeling techniques to measure interest rate risk. These techniques measure the sensitivity of future earnings due to changing interest rate environments. Guidelines established by the Company’s Asset/Liability Committee and approved by the board of directors are used to monitor exposure of earnings at risk. General interest rate movements are used to develop sensitivity as the Company feels it has no primary exposure to specific points on the yield curve. For the three and nine

 

56



 

months ended September 30, 2013 our Company utilized a 400 basis point immediate and gradual move in interest rates (both upward and downward) applied to both a parallel and proportional yield curve.

 

The following table represents estimated interest rate sensitivity and periodic and cumulative gap positions calculated as of September 30, 2013. Significant assumptions used for this table included: loans will repay at historic repayment rates; certain interest-bearing demand accounts are interest sensitive due to immediate repricing, and fixed maturity deposits will not be withdrawn prior to maturity. A significant variance in actual results from one or more of these assumptions could materially affect the results reflected in the table.

 

 

 

 

 

 

 

 

 

 

 

 

 

Over

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5 Years or

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

No stated

 

 

 

(In thousands)

 

Year 1

 

Year 2

 

Year 3

 

Year 4

 

Year 5

 

Maturity

 

Total

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities

 

$

17,412

 

$

26,892

 

$

41,093

 

$

16,312

 

$

12,375

 

$

99,545

 

$

213,629

 

Federal funds sold and other over-night interest-bearing deposits

 

1,090

 

 

 

 

 

 

1,090

 

Other restricted investments

 

4,001

 

 

 

 

 

 

4,001

 

Loans

 

362,560

 

123,511

 

114,578

 

95,051

 

95,497

 

31,845

 

823,042

 

Total

 

$

385,063

 

$

150,403

 

$

155,671

 

$

111,363

 

$

107,872

 

$

131,390

 

$

1,041,762

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings, interest checking, and money market deposits

 

$

238,457

 

$

 

$

174,430

 

$

 

$

 

$

 

$

412,887

 

Time deposits

 

239,132

 

61,883

 

28,037

 

12,454

 

17,126

 

 

358,632

 

Federal funds purchased and securities sold under agreements to repurchase

 

25,007

 

 

 

 

 

 

25,007

 

Subordinated notes

 

49,486

 

 

 

 

 

 

49,486

 

Federal Home Loan Bank advances

 

10,013

 

 

3,000

 

3,000

 

8,000

 

 

24,013

 

Total

 

$

562,095

 

$

61,883

 

$

205,467

 

$

15,454

 

$

25,126

 

$

 

$

870,025

 

Interest-sensitivity GAP

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Periodic GAP

 

$

(177,032

)

$

88,520

 

$

(49,796

)

$

95,909

 

$

82,746

 

$

131,390

 

$

171,737

 

Cumulative GAP

 

$

(177,032

)

$

(88,512

)

$

(138,308

)

$

(42,399

)

$

40,347

 

$

171,737

 

$

171,737

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ratio of interest-earning assets to interest-bearing liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Periodic GAP

 

0.69

 

2.43

 

0.76

 

7.21

 

4.29

 

NM

 

1.20

 

Cumulative GAP

 

0.69

 

0.86

 

0.83

 

0.95

 

1.05

 

1.20

 

1.20

 

 

Effects of Inflation

 

The effects of inflation on financial institutions are different from the effects on other commercial enterprises since financial institutions make few significant capital or inventory expenditures, which are directly affected by changing prices. Because bank assets and liabilities are virtually all monetary in nature, inflation does not affect a financial institution as much as do changes in interest rates. The general level of inflation does underlie the general level of most interest rates, but interest rates do not increase at the rate of inflation as do prices of goods and services. Rather, interest rates react more to changes in the expected rate of inflation and to changes in monetary and fiscal policy.

 

Inflation does have an impact on the growth of total assets in the banking industry, often resulting in a need to increase capital at higher than normal rates to maintain an appropriate capital to asset ratio. In the opinion of management, inflation did not have a significant effect on the Company’s operations for the nine months ended September 30, 2013.

 

57



 

Item 4. Controls and Procedures

 

Our Company’s management has evaluated, with the participation of our principal executive and principal financial officers, the effectiveness of our disclosure controls and procedures as defined in Rules 13a — 15(e) or 15d — 15(e) of the Securities Exchange Act of 1934 as of September 30, 2013.  Based upon and as of the date of that evaluation, our principal executive and principal financial officers concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports we file and submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported as and when required.  It should be noted that any system of disclosure controls and procedures, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met.  In addition, the design of any system of disclosure controls and procedures is based in part upon assumptions about the likelihood of future events. Because of these and other inherent limitations of any such system, there can be no assurance that any design will always succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

 

There has been no change in our Company’s internal control over financial reporting that occurred during the three months ended September 30, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

Impact of New Accounting Standards

 

No new accounting pronouncements issued during the three months ended September 30, 2013, have had or are expected to have a significant impact on the Company’s consolidated financial statements.

 

58



 

PART II - OTHER INFORMATION

 

Item 1.

Legal Proceedings

 

 

 

 

 

The information required by this Item is set forth in Note 16, Pending Litigation, in our

 

 

Company’s Notes to Consolidated Financial Statements (unaudited).

 

 

 

 

Item 1A.

Risk Factors

None

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

None

 

 

 

Item 3.

Defaults Upon Senior Securities

None

 

 

 

Item 4.

Mine Safety Disclosures

None

 

 

 

Item 5.

Other Information

None

 

 

 

Item 6.

Exhibits

 

 

Exhibit No.

 

Description

 

 

 

3.1

 

Restated Articles of Incorporation of our Company (filed as Exhibit 3.1 to our Company’s current report on Form 8-K on August 9, 2007 and incorporated herein by reference).

 

 

 

3.2

 

Amended and Restated Bylaws of our Company (filed as Exhibit 3.1 to our Company’s current report on Form 8-K on June 8, 2009 and incorporated herein by reference).

 

 

 

4.1

 

Specimen certificate representing shares of our Company’s $1.00 par value common stock (filed as Exhibit 4.1 to our Company’s Annual Report on Form  10-K for the fiscal year ended December 31, 1999 (Commission file number 0-23636) and incorporated herein by reference).

 

 

 

31.1

 

Certificate of the Chief Executive Officer of our Company pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

 

Certificate of the Chief Financial Officer of our Company pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

32.1

 

Certificate of the Chief Executive Officer of our Company pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

32.2

 

Certificate of the Chief Financial Officer of our Company pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

101

 

Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Changes in Equity, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to Consolidated Financial Statements, tagged as blocks of text and in detail (XBRL)

 

59



 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

HAWTHORN BANCSHARES, INC.

 

 

Date

 

 

 

 

/s/ David T. Turner

 

 

November 14, 2013

David T. Turner, Chairman of the Board and Chief Executive Officer (Principal Executive Officer)

 

 

 

 

 

/s/ W. Bruce Phelps

 

 

November 14, 2013

W. Bruce Phelps, Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

 

60



 

HAWTHORN BANCSHARES, INC.

 

INDEX TO EXHIBITS

 

September 30, 2013 Form 10-Q

 

Exhibit No.

 

Description

 

Page No.

3.1

 

Restated Articles of Incorporation of our Company (filed as Exhibit 3.1 to our Company’s current report on Form 8-K on August 9, 2007 and incorporated herein by reference).

 

**

 

 

 

 

 

3.2

 

Amended and Restated Bylaws of our Company (filed as Exhibit 3.1 to our Company’s current report on Form 8-K on June 8, 2009 and incorporated herein by reference).

 

**

 

 

 

 

 

4.1

 

Specimen certificate representing shares of our Company’s $1.00 par value common stock (filed as Exhibit 4.1 to our Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (Commission file number 0-23636) and incorporated herein by reference).

 

**

 

 

 

 

 

31.1

 

Certificate of the Chief Executive Officer of our Company pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

62

 

 

 

 

 

31.2

 

Certificate of the Chief Financial Officer of our Company pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

63

 

 

 

 

 

32.1

 

Certificate of the Chief Executive Officer of our Company pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

64

 

 

 

 

 

32.2

 

Certificate of the Chief Financial Officer of our Company pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

65

 

 

 

 

 

101

 

Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Changes in Equity, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to Consolidated Financial Statements, tagged as blocks of text and in detail (XBRL)

 

*

 


*As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933, as amended, and Section 18 of the Securities Exchange Act of 1934, as amended.

**Incorporated by reference.

 

61